Asked by Mathew Temisan on May 09, 2024
Verified
Suppose that Christine values a baseball hat at $20, and Mark values one at $18. The pretax price of a baseball hat is $14. The government imposes a $5 tax on baseball hats, which raises the price to $19. What is the deadweight loss from the tax?
Deadweight Loss
A loss of economic efficiency that can occur when equilibrium for a good or a service is not achieved or is not achievable, leading to a misallocation of resources.
Baseball Hat
A type of soft cap with a rounded crown and a stiff bill projecting in front.
Tax
A mandatory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures.
- Examine the effects of taxation on market operations and determine the deadweight loss attributable to taxes.
Verified Answer
GK
Greeshma KowluriMay 11, 2024
Final Answer :
Prior to the tax, consumer surplus was $10 -- $6 for Christine ($20-$14) and $4 for Mark ($18-$14). After the tax, consumer surplus shrinks to $1 -- $1 for Christine ($20-$19); Mark no longer buys a hat. Tax revenue increases by $5 (from Christine). Deadweight loss is $4 because $10-$1-$5=$4.
Learning Objectives
- Examine the effects of taxation on market operations and determine the deadweight loss attributable to taxes.