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Introducing Taxes and Tax Incidence quiz

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  • Why does the government impose taxes?
    The government imposes taxes to fund public services such as education, police, and fire services.
  • What is a per unit tax?
    A per unit tax is a tax charged for each unit of a good that is exchanged in the market.
  • How does a tax affect the demand or supply curve?
    A tax shifts the demand or supply curve to the left by the amount of the tax.
  • What happens to the equilibrium quantity when a tax is imposed?
    The equilibrium quantity decreases, meaning less of the good is exchanged in the market.
  • How does a tax create market inefficiency?
    A tax causes the market to move away from the original equilibrium, resulting in fewer exchanges and inefficiency.
  • What is the difference between the price buyers pay and the price sellers receive after a tax?
    Buyers pay the price of the good plus the tax, while sellers receive only the price of the good, not including the tax.
  • Does it matter whether the tax is imposed on buyers or sellers?
    No, the final prices to buyers and sellers and the quantity exchanged are the same regardless of who is initially taxed.
  • What is tax incidence?
    Tax incidence is the way the burden of a tax is split between buyers and sellers.
  • How do you calculate the consumer's tax incidence in dollars?
    Subtract the original price from the new price buyers pay; for example, \(7.10 - \)6.00 = \$1.10 per unit.
  • How do you calculate the producer's tax incidence in dollars?
    Subtract the new price sellers receive from the original price; for example, \(6.00 - \)5.10 = \$0.90 per unit.
  • How do you find the percentage of the tax paid by consumers?
    Divide the consumer's tax incidence by the total tax; for example, \(1.10 / \)2.00 = 55%.
  • How do you find the percentage of the tax paid by producers?
    Divide the producer's tax incidence by the total tax; for example, \(0.90 / \)2.00 = 45%.
  • What happens to the supply curve when a tax is imposed on sellers?
    The supply curve shifts to the left by the amount of the tax.
  • What happens to the demand curve when a tax is imposed on buyers?
    The demand curve shifts to the left by the amount of the tax.
  • If a \$2 tax is imposed and the original price is \$6, what are the new prices to buyers and sellers if the buyer pays \$7.10 and the seller receives \$5.10?
    The buyer pays \$7.10, the seller receives \$5.10, and the \$2 tax is split between them as \$1.10 and \$0.90 respectively.