The usual notion of deadweight loss is not appropriate for evaluating the cigarette tax. Show
Normally, distortion of behaviour is an undesirable effect of taxation. However, in the case of cigarettes, a major There are externalities involved that smokers do not take into account (the health costs of secondhand smoke, for example), and to the extent that cigarettes may be addictive, it is not clear that truly voluntary exchange results from the free market. As a result, the deadweight loss from reducing production and consumption of cigarettes may actually be a social gain. Ironically, the inelastic demand means that even if the distortion of behaviour is positive, it is also relatively slight, unless the tax rate is quite high. Recommended textbook solutions
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Statistical Techniques in Business and Economics15th EditionDouglas A. Lind, Samuel A. Wathen, William G. Marchal 1,236 solutions $0, -$10, $0 In this case, the entire tax is passed to Sofia, the consumer. Therefore, there is no change in producer surplus, because the price received by Sam remains the same, but there is a decrease of $10 in consumer surplus because Sofia now pays $10 more than before. Since no mutually beneficial transactions are lost as a result of the tax, all of the decrease in consumer surplus goes to government revenue. Therefore, overall surplus remains the same, and deadweight loss is zero. See Section: How a Tax Affects Market Participants. Recommended textbook solutions
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How does a tax increase affect the supply curve?Increasing tax If the government increases the tax on a good, that shifts the supply curve to the left, the consumer price increases, and sellers’ price decreases. A tax increase does not affect the demand curve, nor does it make supply or demand more or less elastic.
How do supply and demand affect tax incidence?Suppose that a tax is put in place on the producer. If the tax is imposed on a good where both supply and demand are somewhat elastic, but supply is more elastic than demand, the tax incidence will be borne: (a) who pays the tax out of pocket.
What is the relationship between consumer prices and producer prices?(e) Consumer prices and producer prices converge at the same point. Consumer prices increase and producer prices increase. (a) many substitutes. (b) few substitutes. (c) few complements. (d) an elastic demand.
When a tax is imposed on a good what usually happens to consumer and producer surplus?There are two main economic effects of a tax: a fall in the quantity traded and a diversion of revenue to the government. A tax causes consumer surplus and producer surplus (profit) to fall..
When a tax is imposed on a good what usually happens to consumer and producer surplus quizlet?When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases. The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue, became known as supply-side economics. You just studied 20 terms!
When a tax is imposed on some good what happens to the amount of the good bought and sold?A tax on a good raises the price buyers pay, lowers the price sellers receive, and reduces the quantity sold. 7. The burden of a tax is divided between buyers and sellers depending on the elasticity of demand and supply.
When a tax is imposed on some good what tends to happen to consumer prices and producer prices?When a tax is imposed on some good, what tends to happen to consumer prices and producer prices? Consumer prices increase and producer prices decrease.
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When a tax is imposed on some good what usually happens to consumer and producer surplus quizlet?
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