Multiple Choice
Suppose that a unit tax of $2 is imposed on producers with initial equilibrium of $10. If the demand curve is vertical and the supply curve is upward-sloping, what will be the price faced by consumers after the tax?
6. Introduction to Taxes and Subsidies
Elasticity and Taxes
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
A tax imposed on consumers of a good:
A
Creates a loss only for consumers
B
Creates a loss only for producers
C
Creates a deadweight loss for society as a whole
D
Creates a net gain for society as a whole
Verified step by step guidance1
Understand the concept of a tax imposed on consumers: When a tax is levied on consumers, it effectively increases the price they pay for a good or service. This can lead to a decrease in the quantity demanded.
Analyze the impact on consumers: Consumers face a higher price, which reduces their consumer surplus. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
Analyze the impact on producers: Producers may receive a lower effective price for their goods, reducing their producer surplus. Producer surplus is the difference between what producers are willing to accept for a good and what they actually receive.
Define deadweight loss: Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achieved. In the case of a tax, it represents the loss of total surplus (consumer surplus + producer surplus) that is not offset by tax revenue.
Conclude with the societal impact: The tax creates a deadweight loss for society as a whole because the reduction in total surplus (consumer and producer surplus) exceeds the tax revenue collected by the government, leading to an overall loss in economic welfare.
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