Asked by Yating Zhong on May 09, 2024
Verified
Suppose that Kara values a hot fudge sundae at $6 and Stacia values one at $5. The pretax price of a hot fudge sundae is $3. The government imposes a $1 tax on hot fudge sundaes, which raises the price to $4. What is the deadweight loss from the tax?
Deadweight Loss
The reduction in economic efficiency that happens when a good or service does not reach or cannot reach its equilibrium.
- Describe how taxation impacts economic efficacy and contributes to deadweight loss.
Verified Answer
RO
Regan Olamide
May 16, 2024
Final Answer :
Prior to the tax, consumer surplus was $5 -- $3 for Kara ($6-$3) and $2 for Stacia ($5-$3). After the tax, consumer surplus shrinks to $3 -- $2 for Kara ($6-$4) and $1 for Stacia ($5-$4), but tax revenue increases by $2 ($1 from Kara and $1 from Stacia). Deadweight loss is $0 because $5-$3-$2=$0. Said another way, the loss in consumer surplus equals the tax revenue raised.
Learning Objectives
- Describe how taxation impacts economic efficacy and contributes to deadweight loss.