If the government doubles the tax on gasoline, can you be sure that revenue from the gasoline
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If the government doubles the tax on gasoline, can you be sure that revenue from the gasoline tax will rise? Can you be sure that the deadweight loss from the gasoline tax will rise? Explain. |
Here is a tip:
Deadweight loss is the loss of total surplus arising out of an inefficiency in a market due to imposition of a tax.
Explanation
Whether the tax revenue will increase or decrease depends upon the side of the Laffer curve where the tax rates lie.
The Laffer curve shows the relationship between tax rates and revenue from taxes.
If the new tax rate lies above the initial tax rate on the Laffer curve, then the tax revenue will rise; whereas, if it lies below the initial tax rate, then the tax revenue will fall.
Deadweight loss will surely increase due to doubling of a tax on gasoline because the imposition of taxes make the markets inefficient due to unrealized gains that could not be captured.
Verified Answer
The tax revenue might increase or decrease after doubling the tax on gasoline because it depends on the relative positions of the tax rates on the Laffer curve.
The deadweight loss will definitely increase due to doubling of the tax because of the fact that taxes create deadweight loss in the society as a whole.
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