The quantity traded times the tax equals:
Multiple choice question.
the income spent by the buyers.
the tax revenue from a tax.
the sum of buying and selling.
the income earned by the sellers.
The Correct Answer and Explanation is:
Correct answer: the tax revenue from a tax.
When a government imposes a tax on a good or service, the amount of tax revenue it collects is calculated by multiplying the quantity traded by the tax per unit. This is a foundational concept in economics and public finance, helping determine how much money the government will receive from taxing a particular market.
To understand this better, consider a supply and demand diagram where a per-unit tax is introduced. This tax creates a wedge between what buyers pay and what sellers receive. As a result, the equilibrium quantity traded in the market decreases. Despite this reduction in trade, the government still earns revenue on each unit that is sold. The tax revenue is represented by the rectangle formed between the new price paid by buyers and the new price received by sellers, multiplied by the quantity traded after the tax is applied.
For example, if a government imposes a $2 tax on a product and 1,000 units are sold, the total tax revenue would be $2,000 (i.e., 1,000 units × $2 per unit). This revenue can be used for public goods, infrastructure, healthcare, education, or other government services.
It’s important not to confuse this with the income earned by sellers or the amount spent by buyers. The income earned by sellers depends on the post-tax price they receive, which is typically lower than the price before the tax was imposed. Similarly, the amount spent by buyers includes both the base price and the tax, but only the tax portion goes to the government as revenue.
Thus, quantity traded × tax = tax revenue, making “the tax revenue from a tax” the correct answer.
