Tax Revenue and Deadweight Loss
Why do taxes exist? What are the effects of taxes? We discuss how taxes affect consumer surplus and producer surplus and discuss the concept of deadweight loss at
Why do taxes exist? What are the effects of taxes? We discuss how taxes affect consumer surplus and producer surplus and discuss the concept of deadweight loss at length. We’ll also look at a real-world example of deadweight loss: taxing luxury yachts in the 1990s.
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Regarding the following 2 questions:
"Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what will happen to the $15 of economic benefit?"
I have asnswered that this $ 15 will be decreased since there is $ 5 will be gone for the Tax but the answer was wrong, is there any clarification or I have misunderstood something?
The 2nd question is:
The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?
I have answered the "Prices" but again the answer was wrong, could you help me with clarification?
Thanks - Helu.