B. “A tax that raises no revenue for the government cannot have any deadweight loss.

The statement, "A tax that raises no revenue for the government cannot have any deadweight loss," is
incorrect. An example is the case of a 100 percent tax imposed on sellers. With a 100 percent tax on their
sales of the good, sellers won't supply any of the good, so the tax will raise no revenue. Yet the tax has a
large deadweight loss, since it reduces the quantity sold to zero.

1. Consider the market for rubber bands.

a. If this market has very elastic supply and very inelastic demand, how would the burden of
a tax on rubber bands be shared between consumers and producers? Use the tools of
consumer surplus and producer surplus in your answer.
https://www.coursehero.com/file/p2ipda5mo/3-a-The-statement-A-tax-that-has-no-
deadweight-loss-cannot-raise-any-revenue/
b. If this market has very inelastic supply and very elastic demand, how would the burden of
a tax on rubber bands be shared between consumers and producers? Contrast your
answer with your answer to part (a).
https://www.coursehero.com/file/p2ipda5mo/3-a-The-statement-A-tax-that-has-no-
deadweight-loss-cannot-raise-any-revenue/

NOTE: over larger time period, thing become more elastic as substitute effect come into play

2. After economics class one day, your friend suggests that taxing food would be a good way to
raise revenue because the demand for food is quite inelastic. In what sense is taxing food a
“good” way to raise revenue? In what sense is it not a “good” way to raise revenue?
Taxing food may be a good way to raise revenue because the demand curve for food is very
inelastic: everybody has to buy food to eat. Therefore, if the price increases
people would not be able to find close substitutes and they’ll buy food, what would
result in an increase of revenues. But in the other hand, taxing food is not good because
eating is a basic necessity and it’s already too much difficult for some people to obtain it, so
rising the price would be cruel. All families’ purchasing power would decline and that
would make decrease too the demand for the rest of the goods, so other markets in the
country would be worst.
3. This chapter analyzed the welfare effects of a tax on a good. Consider now the opposite
policy. Suppose that the government subsidizes a good: For each unit of the good sold, the
government pays $2 to the buyer. How does the subsidy affect consumer surplus, producer
surplus, tax revenue, and total surplus? Does a subsidy lead to a deadweight loss? Explain.

https://www.slader.com/discussion/question/this-chapter-analyzed-the-welfare-effects-of-a-
tax-on-a/
4. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27
each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day.
What can you say about Bob’s short-run decision regarding shutdown and his long-run
decision regarding exit?
Since Bob’s average total cost is $280/10 = $28, which is greater than the price he earns to mow
a lawn, he will exit the industry in the long run. Since fixed cost is $30, average variable cost is
($280 - $30)/10 = $25 (formula used is first found the Variable cost by AC-FC and then average
 by dividing it with 10), which is less than price to mow a lawn, so Bob won’t shut down in the
short run.

NOTE:

I. Total profit found by Total Revenue – total cost

II. Industry is competitive if the marginal revenue remains constant and the industry is not in
long run if it has a positive profit

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