Question

The deadweight loss from a tax per unit of good will be smallest in a market with a. inelastic supply and elastic demand. b. inelastic supply and inelastic demand. c. elastic supply and elastic demand. d. elastic supply and inelastic demand.

Answer 1

The deadweight loss from a tax per unit of good will be smallest in a market with inelastic supply and inelastic demand.

The Deadweight loss refers to loss that occurs when supply and demand are not in equilibrium and thus, result in market inefficiency.

Usually, the value of the deadweight loss varies with the demand elasticity and supply elasticity.

So, when the demand or supply is inelastic, the deadweight loss of the taxation will be smaller because the quantity bought or sold varies less with price.

Therefore, the answer is B. because the deadweight loss from a tax per unit of good will be smallest in a market with inelastic supply and inelastic demand.

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