Asked by Angela Pantoja on Jun 20, 2024
Verified
The market for tennis shoes has a horizontal supply curve and a linear, downward-sloping demand curve.Currently the government imposes a tax of t on every pair of tennis shoes sold and does not tax other goods.The government is considering a plan to double the tax on tennis shoes, while leaving other goods untaxed.If the tax is doubled, then
A) the total deadweight loss caused by the doubled tax will be exactly twice the original deadweight loss.
B) the total deadweight loss caused by the doubled tax will be more than twice the original deadweight loss.
C) the total deadweight loss caused by the doubled tax will be less than twice the original deadweight loss.
D) to know if doubling the tax would more than double the deadweight loss, we would have to know the slope of the demand curve.
E) None of the above.
Horizontal Supply Curve
Represents a market situation where the supply of a good is perfectly elastic, indicating the supplier is willing to sell any quantity at a fixed price.
Linear
A straight-line relation in mathematics that expresses a constant rate of increase or decrease between variables.
Deadweight Loss
A loss in economic efficiency that can occur when equilibrium for a good or a service is not achieved or is not achievable.
- Gain insight into the notion of deadweight loss and its triggers within the realms of taxation and state interventions.
Verified Answer
GS
Gabriel SanchezJun 22, 2024
Final Answer :
B
Explanation :
Doubling the tax on a good with a downward-sloping demand curve and a horizontal supply curve leads to a deadweight loss that increases more than proportionally. This is because the tax distorts the market more significantly, reducing the quantity traded by a larger margin and thus creating a larger inefficiency in the market.
Learning Objectives
- Gain insight into the notion of deadweight loss and its triggers within the realms of taxation and state interventions.