When the total surplus lost as a result of a tax is less than the amount of tax revenue collected by the government there is a deadweight loss quizlet?

The usual notion of deadweight loss is not appropriate for evaluating the cigarette tax.

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What is the loss in total surplus resulting from a tax called?
What happens to deadweight loss when there is a surplus?
What happens to total surplus when the government imposes a tax?
What happens to consumer surplus when tax decreases?

Normally, distortion of behaviour is an undesirable effect of taxation.

However, in the case of cigarettes, a major
reason for the tax is to discourage consumption, because the free market equilibrium is not considered to be efficient.

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.

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Sophie pays Sky $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sky, he raises his price to $60. Sophie continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?
a. +$10, −$10, $10
b. $0, $0, $10
c. $0, −$10, $0
d. +$10, −$10, $0

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Tax has a deadweight loss because it induces buyers and sellers to change their behavior.

The tax raises the price paid by buyers, so they consume less. At the same time, the tax lowers the price received by sellers, so they produce less.

Because of these changes in behavior, the size of the market shrinks below the optimum.

The elasticities of supply and de- mand measure how much sellers and buyers respond to the changes in the price and, therefore, determine how much the tax distorts the market outcome.

Hence, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax.

Inelastic supply, and elastic supply:
-Holding the demand curve, and tax size constant, but the price elasticity of supply different. The more elastic the supply curve, the larger the deadweight loss of the tax.

Inelastic supply:
When supply is relatively inelastic, the deadweight loss of a tax is small.
Elastic supply:
When supply is relatively elastic, the deadweight loss of a tax is large.

Inelastic demand, and elastic demand:
- Holding supply curve and the size of the tax constant, but the price elasticity of demand different. The more elastic the demand curve, the larger the deadweight loss of the tax.
Inelastic demand:
When demand is relatively inelastic, the deadweight loss of a tax is small.
Elastic demand:
When demand is relatively elastic, the deadweight loss of a tax is large.

The more responsive buyers and sellers are to changes in the price, the more the equilibrium quantity shrinks.
The greater the elasticities of supply and demand, the greater the deadweight loss of a tax.

• A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus — the sum of consumer surplus, producer surplus, and tax revenue—is called the deadweight loss of the tax.

• Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. Because the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight losses.

• As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.

What is the loss in total surplus resulting from a tax called?

deadweight loss: the fall in total surplus that results from a market distortion, such as a tax.

What happens to deadweight loss when there is a surplus?

As a result, two changes occur. First, an inefficient outcome occurs and the total surplus of society is reduced. The loss in social surplus that occurs when the economy produces at an inefficient quantity is called deadweight loss. In a very real sense, it is like money thrown away that benefits no one.

What happens to total surplus when the government imposes a tax?

When the sale of a good is taxed, both consumer surplus and producer surplus decline. The decline in consumer surplus and producer surplus exceeds the amount of government revenue that is raised, so society's total surplus declines.

What happens to consumer surplus when tax decreases?

In addition, a tax reduces the quantity traded, thereby reducing some of the gains from trade. Consumer surplus falls because the price to the buyer rises, and producer surplus (profit) falls because the price to the seller falls.