Question

For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is: a. $1,750. b. $2,250. c. $3,000. d. $4,500.

Answer 1

Answer:

The dead-weight loss from the tax is $2,250

Explanation:

Free market equilibrium price is P1

Total social economic benefit is the sum of:

• consumer surplus (area below demand curve and above price line P1) and
• producer surplus (area above supply curve and below P1)

When tax is imposed, quantity is reduced, price increased to P2 for consumer, P0 for supplier.

The part of the loss from consumer and producer surplus is compensated with the revenue from tax.

The other part (red triangle) is the dead-weight loss. Its amount is given by the area of the triangle with:

• base length being the tax amount ($15/unit) and
• height being the reduced quantity (300 units)

S = $\frac{1}{2} \times 15 \times 300 = 2,250$