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Question

If a tax on a good is doubled, the deadweight loss from the tax

A doubles. Correct Answer Incorrect Answer
B stays the same. Correct Answer Incorrect Answer
C increases by a factor of four. Correct Answer Incorrect Answer
D could rise or fall. Correct Answer Incorrect Answer
E None of these Correct Answer Incorrect Answer

Solution

If a tax on a good is doubled, the deadweight loss from the tax increases by a factor of four. Where a tax increases linearly, the deadweight loss increases as the square of the tax increase. This means that when the size of a tax doubles, the base and height of the triangle double. Thus, doubling the tax increases the deadweight loss by a factor of 4.

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