Asked by Brooke Candia on Jun 18, 2024
Verified
Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is
A) $250.
B) $500.
C) $750.
D) $1,000.
Deadweight Loss
An economic inefficiency caused by a disruption in market equilibrium, leading to a loss of societal welfare.
Consumer Surplus
The disparity between the ideal total expenditure consumers are willing to make on a good or service and the real expenditure.
Producer Surplus
The distinction in financial terms between what producers expect to receive for a product or service and the actual revenue attained.
- Review the effects of tax policies on the advantages enjoyed by consumers and producers, as well as on total economic gain.
- Identify and work out the deadweight loss emanating from taxation.
Verified Answer
KS
Krytal Shane BalubarJun 20, 2024
Final Answer :
A
Explanation :
The deadweight loss from the tax is the total loss in welfare (consumer surplus + producer surplus) that is not offset by tax revenue. The decrease in consumer surplus is $450, and the decrease in producer surplus is $300, making a total loss of $750. However, the government collects $5 per unit on 100 units, which equals $500 in tax revenue. The deadweight loss is the total loss minus the tax revenue: $750 - $500 = $250.
Learning Objectives
- Review the effects of tax policies on the advantages enjoyed by consumers and producers, as well as on total economic gain.
- Identify and work out the deadweight loss emanating from taxation.