Question

1. When deciding what to tax, we want to tax_____________ instead of  ____________ so that we can take out a  ___________ tax on many people instead of  __________ taxes on just a few. This is because  _____________ taxes create more deadweight loss (DWL) than  ____________ taxes

Answers are

A) Small

B) Large

C) Luxuries

D) Necessities

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1. Using the rule from the question above, which of the following would be BEST to tax?

______   Oatmeal raisin cookies

_______ Metallic blue bicycles

  _______ Shaving creams

_______ Yellow umbrellas

Answer 1

When deciding what to tax, we want to tax_Necessities_ instead of  _Luxuries_ so that we can take out a  _Small_ tax on many people instead of  _Large_ taxes on just a few. This is because  _Large__ taxes create more deadweight loss (DWL) than  _Small_ taxes

(This is true because necessities have inelastic demand so greater revenue from taxes can be collected. Luxuries have elastic demand so a high tax rate is required which creates a greater deadweight loss. This is true because DWL depends directly on tax rate)

This implies that Shaving creams would be BEST to tax because it is relatively inelastic in demand and represents a necessity.