Refer to figure 8-21. Suppose the market is represented by Demand 1 and Supply 1
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Question
Refer to figure 8-21. Suppose the market is represented by Demand 1 and Supply 1. At first the government places a $3 per-unit tax on this good. Then the government decides to raise the tax to $6 per unit. How would you characterize the decision to raise the tax rate from $3 to $6 per unit. The decision is
a) a good one because it increases tax revenue while decreasing the deadweight loss from the tax.
b) a bad one because it does not increase tax revenue yet increases the deadweight loss from the tax.
c) a bad one because it decreases tax revenue while increasing the deadweight loss from the tax.
d) unclear because it increases tax revenue yet also increases the deadweight loss from the tax.
Figure 8-2.1 Sypply 2 Supply 1 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 QExplanation / Answer
b) a bad one because it does not increase tax revenue yet increases the deadweight loss from the tax.
when tax increases to $ 6 per unit then consumption of good will be zero. Due to this, revenue of government will not increase while deadweight loss of economy increases.
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