The revenue collected from a tax equals:
Multiple choice question.
the tax times the quantity traded.
the price times the quantity traded.
the income minus the tax.
the quantity traded times the number of buyers.
The Correct Answer and Explanation is:
Correct answer: the tax times the quantity traded.
Explanation
Tax revenue is the total amount of money the government collects from a tax imposed on a good or service. The correct formula to calculate this is:
Tax Revenue = Tax per Unit × Quantity Traded
This means that the revenue collected is directly dependent on both the size of the tax (how much is charged per unit sold) and the quantity of goods or services that are actually bought and sold in the market.
Let’s say the government imposes a $2 tax on every unit of soda sold. If 1,000 units are sold, the government collects:
$2 (tax per unit) × 1,000 (units traded) = $2,000 in tax revenue.
This calculation reflects the impact of taxes on both supply and demand. When a tax is introduced, it often reduces the quantity traded because it increases the price buyers pay and decreases the price sellers receive. This is why tax revenue doesn’t always increase when the tax rate increases. If the tax is too high, it may discourage trade, leading to a smaller quantity sold, and potentially lower total revenue — a concept illustrated by the Laffer Curve.
Now, let’s consider the incorrect choices:
- Price times the quantity traded gives total market revenue (sales revenue), not tax revenue.
- Income minus the tax is a personal measure of disposable income, not government revenue.
- Quantity traded times the number of buyers has no economic interpretation related to tax revenue.
In summary, tax revenue is strictly tied to how much tax is collected on each unit sold and how many units are actually sold. This simple but important relationship is key in public finance and policy design, especially when considering the efficiency and fairness of taxation
.