Question

Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and decreases producer surplus by $4,400. The deadweight loss of the tax is

a. $200.
b. $400.
c. $600.
d. $1,200.

Answer 1

option (c) $600

Step-by-step explanation:

Given:

Tax = $4 per unit

Initial equilibrium quantity = 2,000 units

Final equilibrium quantity = 1,700 units

Decrease in consumer surplus = $3,000

Decrease in consumer surplus = $4,400

Now,

Deadweight Loss is calculated using the formula:

Deadweight loss

=
`(1)/(2)` × Tax × (Original equilibrium quantity - New equilibrium quantity)

on substituting the respective values, we get

Deadweight loss =
`(1)/(2)` × 4 × (2,000 - 1,700)

or

Deadweight loss = 2 × (3) = $600

Hence,

the correct answer is option (c) $600