1. In the absence of market failures, when the govemment taxes market participan
ID: 1124933 • Letter: 1
Question
1. In the absence of market failures, when the govemment taxes market participants, the effect is to move the market: A. closer to the competitive equilibrium, thereby reducing social efficiency B. closer to the competitive equilibrium, thereby enhancing social efficiency. C. away from the competiive equilibrium, thereby reducing social efficiency D. away from the competitive equilibrium, thereby enhancing social efficiency 2. The deadweight loss of a tax measure is: A. the degree to which consumers relative to producers bear a tax. B. the amount of consumer and producer surplus that society loses by imposing a tax. the decline in consumer surplus relative to the decline of producer surplus caused by imposing a tax. the amount of tax revenue taken from consumers and producers. D 3. All other things equal, the deadweight loss of a tax on producers is higher when supply isAll other things equal, the deadweight loss of a tax on producers is higher when demand is A. elastic; elastic B. elastic; inelastic C. inelastic; elastic D. inelastic; inelastic 4. Which statement related to deadweight loss and efficient tax systems is NOT true? A. The more that government imposes taxes on one source, the faster deadweight B. The more a tax causes output in a market to decrease, the larger the deadweight C. There will be large efficiency costs to moving from a progressive to a D. The efficiency cost of imposing a tax on imperfectly competitive firms is greater loss rises. loss. proportional tax system. than the cost of imposing the same size tax on firms in a perfectly competitive marketExplanation / Answer
Answer : 1. In absense of market failures, when the government taxes market participants, the effect is to move the market : A. closer to the competitive equilibrium, thereby reducing social efficiency.
Because of taxes producers and consumers lose their surplus. Therefore, social efficiency decrease.
2. The deadweight loss of a tax measure is : B. the amount of consumer and producer surplus that society loses by imposing a tax.
3. All other things equal, the deadweight loss of a tax on producers is higher when supply is inelastic . All other things equal, the deadweight loss of a tax on producers is higher when demand is elastic.
Therefore, c. inelastic; elastic is the correct answer.
4.B. The more a tax causes output in a market to decrease, the larger the deadweight loss. This is not related to deadweight loss and efficiency tax system. Because of taxation output production decrease , if output decrease then tax rate decrease and if tax rate decrease then automatically deadweight loss decrease. Hence B is the correct answer.
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