Assume that a competitive market has an upward-sloping supply curve and a downward-sloping demand curve, both of which are linear. A tax of size $T is currently imposed in the market. Suppose the tax is doubled. By what multiple will the deadweight loss increase? (You may assume that at the new tax, the equilibrium quantity is positive.)

Questiom:- Assume that a competitive market has an upward-sloping supply curve and a downward-sloping demand curve, both of which are linear. A tax of size $T is currently imposed in the market. Suppose the tax is doubled. By what multiple will the deadweight loss increase? (You may assume that at the new tax, the equilibrium quantity is positive.) Answer :- Tax revenue varies with the proportion of the tax as a percentage of the product price. In most cases, a moderate tax rate will yield the most tax revenue, as can be seen from the first diagram above. When the tax rate is small or high, tax revenue…

ill be less. When the tax rate is small, the government only gets a small portion of the price paid. When the tax rate is high, then the quantity sold is much less, so even when it is multiplied by the high tax rate, it yields little revenue, which can be seen in the diagrams below. Also illustrated is that the deadweight loss of a high tax rate is much greater than the deadweight loss of a low tax rate.