Suppose that the government imposes a tax on heating...

Suppose that the government imposes a tax on heating oil. Would the deadweight loss of this tax likely be greater in the first year after it is imposed or in the fifth year? Would the tax revenue collected from this tax likely be greater in the first year after it is imposed or in the fifth year? A. The deadweight loss and tax revenue would both be greater in the first year than the fifth. B. The deadweight loss would be greater in the first year than the fifth, but the tax revenue would be greater in the fifth year than the first. C. The deadweight loss would be greater in the fifth year than the first, but the tax revenue would be greater in the first year than the fifth. D. The deadweight loss and tax revenue would both be greater in the fifth year.

Transcript

00:01 So we're analyzing a tax, and the government is going to tax heating oil.

00:04 So i've drawn a market for heating oil, and let's slap a tax on heating oil and see what happens.

00:12 So there's my tax shifting up the supply curve, and we can look at the deadweight loss, right? the deadweight loss is going to be this little triangle in here, right? it's the number of units that where the tax has caused mutually beneficial transactions not to happen.

00:32 It's not very big because i've drawn the tax, the demand curve is very inelastic.

00:38 Why have i drawn a tax curve as very inelastic? well, because in the short term, people don't have the ability to change how they heat their house.

00:48 If you say, if i own a house that heats with fuel oil and you say i'm taxing it, i still have a house that heats with fuel oil.

00:56 Not many people can immediately change their house's heating type in response.

01:01 That means the demand for heating oil is very inelastic, because people don't want to freeze it at.

01:05 That's not an option.

01:06 And they're stuck with heating oil.

01:08 So you're going to get a very inelastic response.

01:11 And when you see that demand curve is very inelastic, very close to vertical, you're going to get a very small deadweight loss.

01:17 But in the longer term, you're going to get a flatter demand curve.

01:21 Because as you give people more and more and more and more years, more and more time to adjust, more and more people are going to change their behavior away from fuel oil based on the tax.

01:33 So now if i hit it with approximately the same tax, you can see that the deadweight loss triangle is getting much, much larger...

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