27.The deadweight loss from a tax of $2 per unit will be smallest in a market witha. inelastic supply and elastic demand.b. inelastic supply and inelasticdemand.ECON 102 INTRODUCTORY MICROECONOMIC ANALYSIS AND POLICY MIDTERM 2 REVIEW QUESTIONS_ Show
c. elastic supply and elastic demand.d. elastic supply and inelastic demand.28.The amount of deadweight loss that results from a tax of a given size is determined byECON 102 INTRODUCTORY MICROECONOMIC ANALYSIS AND POLICY MIDTERM 2 REVIEW QUESTIONS_ Figure 8-1729.Refer to Figure 8-17.Suppose the government imposes a $1 tax in each of the four markets represented by demandcurves D1, D2, D3, and D4. The deadweight will be the smallest in the market represented by 30.As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on, the 31.The Laffer curve relatesa. the tax rate to tax revenue raised by the tax.b. the tax rate to the deadweight loss of the tax.c. the price elasticity of supply to the deadweight loss of thetax.d. government welfare payments to the birth rate. Figure 8-23. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax.32.Refer to Figure 8-23.If the economy is at point B on the curve, then a small decrease in the tax rate willECON 102 INTRODUCTORY MICROECONOMIC ANALYSIS AND POLICY MIDTERM 2 REVIEW QUESTIONS_ Figure 8-1333.Refer to Figure 8-13.Suppose the government places a $5 per-unit tax on this good. The amount of tax revenuecollected by the government is Loss of economic efficiency when the optimal outcome is not achieved What is Deadweight Loss?Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In other words, it is the cost born by society due to market inefficiency. Video Explanation of Deadweight LossBelow is a short video tutorial that describes what deadweight loss is, provides the causes of deadweight loss, and gives an example calculation. Causes of Deadweight Loss
Imperfect Competition and Deadweight LossDeadweight loss also arises from imperfect competition such as oligopolies and monopolies. In imperfect markets, companies restrict supply to increase prices above their average total cost. Higher prices restrict consumers from enjoying the goods and, therefore, create a deadweight loss. Example of Deadweight LossImagine that you want to go on a trip to Vancouver. A bus ticket to Vancouver costs $20, and you value the trip at $35. In this situation, the value of the trip ($35) exceeds the cost ($20) and you would, therefore, take this trip. The net value that you get from this trip is $35 – $20 (benefit – cost) = $15. Before buying a bus ticket to Vancouver, the government suddenly decides to impose a 100% tax on bus tickets. Therefore, this would drive the price of bus tickets from $20 to $40. Now, the cost exceeds the benefit; you are paying $40 for a bus ticket, from which you only derive $35 of value. In such a scenario, the trip would not happen, and the government would not receive any tax revenue from you. The deadweight loss is the value of the trips to Vancouver that do not happen because of the tax imposed by the government. Graphically Representing Deadweight LossConsider the graph below: At equilibrium, the price would be $5 with a quantity demand of 500.
In addition, regarding consumer and producer surplus:
Let us consider the effect of a new after-tax selling price of $7.50: The price would be $7.50 with a quantity demand of 450. Taxes reduce both consumer and producer surplus. However, taxes create a new section called “tax revenue.” It is the revenue collected by governments at the new tax price. With this new tax price, there would be a deadweight loss: As illustrated in the graph, deadweight loss is the value of the trades that are not made due to the tax. The blue area does not occur because of the new tax price. Therefore, no exchanges take place in that region, and deadweight loss is created. Calculating Deadweight LossTo figure out how to calculate deadweight loss from taxation, refer to the graph shown below: Notes:
The deadweight loss is represented by the blue triangle and can be calculated as follows: More ResourcesThank you for reading CFI’s guide to Deadweight Loss. To keep learning and advancing your career, the following resources will be helpful:
In which situation will the deadweight loss from a tax be the smallest?Answer and Explanation: A tax that is paid regardless of what you do/buy would have the smallest deadweight loss relative to tax revenue.
What causes small deadweight loss?Deadweight losses primarily arise from an inefficient allocation of resources, created by various interventions, such as price ceilings, price floors, monopolies, and taxes. These factors lead to the price of a product not being accurately reflected, meaning goods are either overvalued or undervalued.
What determines the size of deadweight loss?The size of the deadweight loss is determined by the elasticities of supply and demand.
What is the value of the deadweight loss at the equilibrium price of $15?Refer to Figure 4-3. What is the value of the deadweight loss at the equilibrium price of $15? Yes, because $15 is the price where the marginal benefit is equal to the marginal cost.
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