10 answers - Quiz 10 COSTS OF TAXATION Questions for Review...

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Quiz 10 COSTS OF TAXATION Questions for Review 1. When the sale of a good is taxed, both consumer surplus and producer surplus decline. The decline in consumer surplus and producer surplus exceeds the amount of government revenue that is raised, so society’s total surplus declines. The tax distorts the incentives of both buyers and sellers, so resources are allocated inefficiently. 2. Figure 1 illustrates the deadweight loss and tax revenue from a tax on the sale of a good. Without a tax, the equilibrium quantity would be Q1, the equilibrium price would be P1, consumer surplus would be A + B + C, and producer surplus would be D + E + F. The imposition of a tax places a wedge between the price buyers pay, PB, and the price sellers receive, PS, where PB = PS + tax. The quantity sold declines to Q2. Now consumer surplus is A, producer surplus is F, and government revenue is B + D. The deadweight loss of the tax is C+E, because that area is lost due to the decline in quantity from Q1 to Q2.
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.

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10 answers - Quiz 10 COSTS OF TAXATION Questions for Review...

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