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5 Cards in this Set
- Front
- Back
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3 effects of a tax
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- Drives a wedge between the price buyers pay and the price sellers receive
- Raises the price buyers pay and lowers the price sellers receive - Reduces the quantity bought & sold |
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What is a deadweight loss of a tax?
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The fall in total surplus that results from a market distortion, such as a tax
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What determines the size of a deadweight loss?
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- When supply is inelastic, DWL is small
- The more elastic supply is, the greater the DWL - When demand is inelastic, DWL is small - The more elastic demand is, the greater the DWL |
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Deadweight losses and the Size of the tax
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- When a tax increases, DWL rises even more.
- When tax rates are low, raising them doesn't cause much harm, and lowering them doesn't bring much benefit. - When tax rates are high, raising them is very harmful, and cutting them is very beneficial. |
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Revenue and the Size of the Tax
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- When the tax is small, increasing it causes tax revenue to rise.
- When the tax is larger, increasing it causes tax revenue to fall - The LAFFER CURVE shows the relationship between the size of the tax and tax revenue (shape is inverted U) |
