Question

A tax on a good
A. gives buyers an incentive to buy less of the good than they otherwise would buy.
B. gives sellers an incentive to produce less of the good than they otherwise would produce.
C. creates a benefit to the government, the size of which exceeds the loss in total surplus to buyers and sellers.
D. All of the above are correct.
E. A and B, only

When a tax is levied on sellers of a good,
A. government collects too little revenue to justify the tax if the equilibrium quantity of the good decreases as a result of the tax.
B. a wedge is placed between the price buyers pay and the price sellers effectively receive (and keep).
C. the effective price to buyers decreases because the demand curve shifts leftward.
D. there is an increase in the quantity of the good supplied.
E. None of the above

Which of the following statement(s) is correct?
(x) Deadweight loss measures the loss in a market to buyers and sellers that is not offset by an increase in government revenue.
(y) Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade due to marginal buyers and sellers leaving the market.
(z) The deadweight loss from taxes is lower when tax rates are lower than when tax rates are higher.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (z) only

Answer 1

Answer 1;

Option E. A tax on a good gives buyers an incentive to buy less of the good than they otherwise would buy and gives sellers an incentive to produce less of the good than they otherwise would produce.

Answer 2;

Option B. Tax creates  a wedge is placed between the price buyers pay and the price sellers effectively receive (and keep) which is equal to the amount of tax levied.

Answer 3:

Option A. All the statements related to deadweight loss are correct. It measures loss in the value of total surplus, it prevents buyers and sellers from realizing gains from trade and it increases as tax rate increases and vice versa.