If a tax on a good is doubled the deadweight loss from the tax ?
Correct answer: C. increase by a factor of four.
- A. doubles
- B. stays the same
- C. increase by a factor of four.
- D. could rise or fall
Explanation
Under the standard linear supply-and-demand model, deadweight loss is proportional to the square of the tax wedge. Doubling the tax therefore increases deadweight loss by four times, assuming the relevant curves and conditions remain unchanged.
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Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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