Question

Which of the following statements about deadweight loss from a tax are true? I. The greater the elasticities of supply and demand, the greater the deadweight loss of a tax. II. Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, which shrinks the size of the market below the level that maximizes total surplus. III. As a tax grows larger, the deadweight loss becomes larger. IV. As a tax grows larger, the tax revenue continually increases.

Answer 1

The correct answer is options I, II and III.

Step-by-step explanation:

The imposition of taxes causes buyers to consume less as their disposable income decreases. Because of the reduction in demand the producers will supply less.

If the elasticities of demand and supply are higher, the deadweight loss will be higher as well.

As the tax rate is increased the deadweight loss will increase as well.

As tax grows larger, the demand and supply increases, this reduces the tax base decreases causing revenue to decrease.