ing forever. Further, when considering whether to leave an inheritance, a wealthy person is choosing between using all of their wealth while alive or passing some of it on. There is good reason to believe that the estate tax would have to be quite high for a person (especially a wealthy person) to feel that it is better to spend all of their wealth while alive. For a poor per- son, the wealth may be needed to purchase necessities, but this is not the case for a wealthy person. In this sense, the estate tax represents a method of taxing wealthy people that could be more effective than the other two mentioned above. 5.As we learned in Chapter 4, the competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies onpricesor the impact of taxes and subsidies onquantities?
6.Consider the following diagram of a tax. The triangular area representing dead- weight loss is highlighted, and its dimensions are labeled “Base” and “Height” (recall that the formula for the area of a triangle is12 × Base × Height). Price a.In order to calculate the deadweight loss of a tax, you don’t need the entire demand and supply diagram; you just need to know two numbers, the base and height of the deadweight loss triangle. What is the real-life meaning of the base? Quantity Supply Demand Base Height What about the height? b.Can you turn your answers to part a into general rules about the deadweight loss associated with taxes? Try phrasing it like this but replacing the part in brackets: “The larger the [base or height], the more deadweight loss is generated by a given tax.” c.Holding the base constant, the height and thus the deadweight loss would get larger if the demand curve or the supply curve were more?
