Chapter 8

• What sparked the American Revolution in 1776?


  The anger of the American colonists over British taxes
• Why is some taxation considered necessary?


  It is essential for funding a civilized society
• How does taxation impact the modern economy?


  It has a large impact and is revisited multiple times in economic studies
• In which chapter did the study of taxes begin?

  Chapter 6
• What is the effect of a tax on a good's price and quantity sold?


  A tax raises the price buyers pay and lowers the price sellers receive
• What determines how the tax burden is distributed between producers and consumers?

  The elasticities of supply and demand
• What does a tax create between the price buyers pay and the price sellers receive?


  A tax wedge
• What happens to the quantity sold when a tax is imposed?


  The quantity sold falls below the level that would be sold without a tax
• How does a tax affect market participants?


  • Buyers pay a higher price
  • Sellers receive a lower price
  • Overall market quantity decreases
• How is the benefit received by buyers measured?


  By consumer surplus
• How is the benefit received by sellers measured?


  By producer surplus
• What does the government use tax revenue for?


  To fund government services and help the needy
• What is the formula for total tax revenue?

  Total tax revenue = T × Q
• What does the area of the rectangle between the supply and demand curves represent?


  The government's tax revenue
• What is total surplus?


  The sum of consumer surplus and producer surplus
• How does a tax affect consumer surplus?


  It reduces consumer surplus
• How does a tax affect producer surplus?


  It reduces producer surplus
• What is the deadweight loss of taxation?


  The loss in total surplus that exceeds the tax revenue raised
• Why do taxes cause deadweight losses?


  They distort incentives and reduce market efficiency
• What happens to the market size when a tax is imposed?


  The market size shrinks below its optimum
• What is the opportunity cost of Malik's time in the example provided?


  $80
• What is the value of a clean house to Mei?


  $120
• How much benefit do Malik and Mei each receive from their deal?


  $20
• What happens when a $50 tax is levied on cleaning services?


  Malik and Mei cancel their arrangement
• What is the total loss to Malik and Mei due to the tax?


  $40
• What is pure deadweight loss?


  A loss to buyers and sellers that is not offset by government revenue
• What is the ultimate source of deadweight losses?


  Taxes that prevent buyers and sellers from engaging in transactions