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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with _______    elasticities of demand and _______ elasticities of supply.

a. small, small

b. small, large

c. large, small

d. large, large

To determine
The impact of taxes on the elasticity of demand and supply.

Explanation

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax. When there is a tax, it will lead to fall in the consumer surplus as well as in the producer surplus. As a result, the total surplus which is the summation of the consumer surplus and the producer surplus will fall and this fall will occur in the total surplus due to taxation which is known as the deadweight loss due to tax.

Option (a):

The elasticity of the demand curve and the supply curve is directly related to the tax revenue of the government. When the demand curve and the supply curve are inelastic, the tax rate will bring no change in the quantity demanded and supplied and this will help the government to increase the tax revenue collected through increasing the tax. When the two curves are elastic, the fall in the quantity demanded and supplied to the increase in the price due to tax will be much higher which will reduce the tax revenue. Thus, option 'a' is correct.

Option (b):

The elasticity of the demand curve and the supply curve is directly related to the tax revenue of the government. When the demand curve and the supply curve are inelastic, the tax rate will bring no change in the quantity demanded and supplied and this will help the government to increase the tax revenue collected through increasing the tax and vice versa...

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