CHAPTER 8 INFO TxQ Vocab Deadweight Loss A fall in total surplus that results from a market distortion such as a tax Underground Economy Illegal Economic Activity Under the table Total Government Tax Revenue Size of the Tax x Quantity of the good sold or Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade The GREATER the elasticities of supply and demand the greater the deadweight loss of a tax Inelastic Supply or Demand curve Small Dead Weight Loss Increase in tax results in increase deadweight loss HIGHER tax results in a drastically DECREASES size of the market Tax INCREASE causes a LARGER dead weight loss Deadweight Loss Curve As the tax increases the dead weight loss grows exponentially Laffer Curve shows that tax revenue first rises with the size of the tax but as the tax gets larger the market shrinks so much that TAX REVENUE starts to FALL The more elastic supply and demand are in any market the more taxes in the market distort behavior and the more likely it is that a tax cut will increase tax revenue
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