chapter 8 vocabulary

chapter 8 vocabulary - deadweight loss The fall in total...

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deadweight loss The fall in total surplus that results from a market distortion, such as a tax. Chapter Recap: Summary  o A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in  consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total  surplus–the sum of consumer surplus, producer surplus, and tax revenue–is called the deadweight loss of  the tax.  o Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less,  and these changes in behavior shrink the size of the market below the level that maximizes total surplus.  Because the elasticities of supply and demand measure how much market participants respond to market  conditions, larger elasticities imply larger deadweight losses.  o As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax  reduces the size of the market, however, tax revenue does not continually increase. It first rises with the  size of a tax, but if a tax gets large enough, tax revenue starts to fall. Chapter Recap: Questions for Review  1. What happens to consumer and producer surplus when the sale of a good is taxed? How does the  change in consumer and producer surplus compare to the tax revenue? Explain.  2. Draw a supply-and-demand diagram with a tax on the sale of the good. Show the deadweight loss.  Show the tax revenue.  3. How do the elasticities of supply and demand affect the deadweight loss of a tax? Why do they have  this effect?  4. Why do experts disagree about whether labor taxes have small or large deadweight losses?  5. What happens to the deadweight loss and tax revenue when a tax is increased?  Chapter Recap: Problems and Applications  1. The market for pizza is characterized by a downward-sloping demand curve and an upward-sloping  supply curve. 
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a. Draw the competitive market equilibrium. Label the price, quantity, consumer surplus, and producer  surplus. Is there any deadweight loss? Explain.  b. Suppose that the government forces each pizzeria to pay a $1 tax on each pizza sold. Illustrate the 
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