Question

Explain in your own words and add an example

Expert Q&A Done Please explain the following in your own words: Affect of tax imposition on buyers and sellers Relationship between the tax size and tax revenue and tax size and deadweight loss Notes: Type all the answers in a word file and attach with your submission Each response must be four full lines

Answer 1

When government imposes taxes to maximize revenue both buyers are sellers are affected. Because of tax buyer has to pay more resulting in reduced demand in the market. On the contrary, the seller will receive less which will lead to a reduction in supply. Sometimes the government tries to divide the tax share between the buyers and sellers in different proportions.

At a tax rate may vary from 0% to 100% of income. Tax revenue will be zero at 0% tax rate as well as with a 100% tax rate. The tax revenue will be maximum somewhere between 0% to 100% tax rate.

Higher the tax size higher is the deadweight loss and there is a reduction in the tax revenue. The deadweight loss also depends on the elasticity of demand and elasticity of supply. More the elasticity more is the deadweight loss and there is a reduction in tax rate.