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Suppose that the government imposes a tax on heating
Chapter , Problem 4(choose chapter or problem)
Suppose that the government imposes a tax on heating oil.
a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
b. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
Questions & Answers
QUESTION:
Suppose that the government imposes a tax on heating oil.
a. Would the deadweight loss from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
b. Would the revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? Explain.
ANSWER:Step 1 of 3
Deadweight loss is an indicator of market inefficiency. This loss occurs as the resources are inefficiently allocated from the viewpoints of producers and consumers.
Due to the imposition of tax on heating oil, the market prices of heating oil will rise in the market. When the price of heating oil rises, then the purchasing power of consumers to buy heating oil falls. In the first year, when these prices are increased, the consumers are not likely to deduce their heating oil demands.