Question

If the government changed the per-unit tax from $5.00 to $2.50, then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax rate would

Answer 1

Answer: Decrease government revenue and decrease deadweight loss from the tax.

Explanation:

Decrease gov rev and decrease deadweight loss from the tax.

At AB, the government revenue will be:

= Quantity × Tax rate

= 1 × 5

= 5

The deadweight loss will be:

Deadweight Loss= 0.5 × Change in quantity × Change in Price

= 0.5 × (9-4) × (2-1)

= 0.5 × 5 × 1

= 2.5

At CD,

the government revenue will be:

= 1.5 × 2.5

= 3.75

The deadweight loss will be:

= 0.5 × (7.5-5) × (2-1.5)

= 0.5 × 2.5 × 0.5

= 0.625

Based on the calculation above, both the government revenue and the deadweight loss decreases.