Question

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has.

Answer 1

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has caused a deadweight loss.

What is meant by deadweight loss?

• The gap between the production and consumption of any given good or service, including taxes, is referred to as deadweight loss in economics. Deadweight loss is most frequently detected when the quantity generated compared to the quantity consumed deviates from the ideal surplus concentration.
• Overproduction of commodities results in a loss of money. For instance, a baker might only sell 80 of the 100 loaves of bread they produce. There will be a deadweight loss since the 20 remaining loaves will become moldy and dry, and they will need to be thrown away.
• The loss in economic activity that results when the market pricing of products or services change negatively affects consumers and businesses is referred to as deadweight loss.
• You need to know the change in price and the change in quantity demanded in order to compute deadweight loss. Deadweight Loss is calculated using the following formula:. 5 * (P2 - P1) * (Q1 - Q2).

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has caused a deadweight loss.

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