Norm and his creative team need to present an idea for marketing a new detergent to the head of their advertising agency. Diane,
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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 =
