Question

In: Finance

If we consider only a single market, the efficiency loss of a tax on the sales...

If we consider only a single market, the efficiency loss of a tax on the sales of snack food will be zero when ______.

Group of answer choices

the demand for snack food is perfectly elastic

the supply of snack food is perfectly inelastic

an ad valorem tax is used

a value added tax is used

Solutions

Expert Solution

Answer =

If we consider only a single market ,the efficiency loss of a tax on the sales of snack food will be zero when the supply of snack food is perfectly inelastic.

Reasons are given below :

meaning of efficiency of loss of a tax ,

  • It also known as deadweight loss of tax
  • In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal (resource allocation where it is impossible to make any one individual better off without making at least one individual worse off).
  • Causes of deadweight loss can include actions that prevent the market from achieving an equilibrium clearing condition (where supply and demand are equal) and include taxes or subsidies and binding price ceilings or floors (including minimum wages).
  • Deadweight loss can generally be referenced as a loss of surplus to either the consumer, producer, or both.
  • A tax cause a deadweight loss because itcauses buyers and sellers to change their behavior. Buyers tend to consume less when the tax raises the price.
  • When the tax lowers the price received by sellers, they in turn produce less. As a result, the overall size of the market decreases below the optimum equilibrium.

meaning of perfectly inelastic supply ,

  • Perfectly inelastic demand or supply is an economic condition in which a change in the price of a product or a service has no impact on the quantity demanded or supplied because the elasticity of demand or supply is equal to zero.

thus , in a single market , efficiency loss of a tax on sales of snack food will be zero when the supply of snack food is perfectly inelastic, due to following reason :

How Deadweight Loss Varies with Elasticity is as follows

  • Monopoly is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. ... He enjoys the power of setting the price for his goods.
  • The amount of the deadweight loss varies with both demand elasticity and supply elasticity.
  • When either demand or supply is inelastic, then the deadweight loss of taxation is smaller, because the quantity bought or sold varies less with price.
  • With perfect inelasticity, there is no deadweight loss. Because in Perfectly inelastic demand or supply is an economic condition in which a change in the price of a product or a service has no impact on the quantity demanded or supplied because the elasticity of demand or supply is equal to zero.
  • However, deadweight loss increases proportionately to the elasticity of either supply or demand.

Other options given in the question are in detalied view ,

  • A perfectly elastic demandcurve is represented by a straight horizontal line and shows that the market demand for a product is directly tied to the price. In fact, thedemand is infinite at a specific price. Thus, a change in price would eliminate all demand for the product
  • An ad valorem tax is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax.
  • A value-added tax (VAT) is a consumption taxlevied on products at every point of sale wherevalue has been added, starting from raw materials and going all the way to the final retail purchase. ... For example, if a product costs $100 and there is a 15% VAT, the consumer pays $115 to the merchant.

Hope you understand the answer in detail.

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