Refer to Figure 8-7. If the government changed the per-unit tax from $5.00 to $2.50, then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax rate would

A) increase government revenue and increase the deadweight loss from the tax.
B) increase government revenue and decrease the deadweight loss from the tax.
C) decrease government revenue and increase the deadweight loss from the tax.
D) decrease government revenue and decrease the deadweight loss from the tax.

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Bhuvi Relan · Accepted Answer

Final Answer : D, Explanation :  Decreasing the per-unit tax from $5.00 to $2.50 would likely decrease government revenue because the tax per unit sold is lower. However, it would also decrease the deadweight loss because the tax is less distortive at a lower rate, allowing for a closer approach to the market equilibrium quantity.

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