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

    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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