Question

Suppose that the equilibrium quantity in the market for widgets has been 250 per month. Then a tax of $5 per widget is imposed. The price paid by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government can raise 1000 per month in revenue from the tax. What is the deadweight loss from the tax?

Answer 1

The deadweight loss from the tax on widgets is a concept in economics representing the reduction in economic efficiency resulting from the tax. While the tax generates revenue for the government, it also reduces consumer and producer surplus due to decreased quantity sold. The exact deadweight loss amount, however, cannot be calculated without further information on the demand and supply curves.

Step-by-step explanation:

The question involves understanding the concept of deadweight loss due to taxation in economics. When a government imposes a tax on widgets, it creates a separation between the price paid by buyers and the price received by sellers. This not only raises revenue for the government but also leads to a loss in economic efficiency known as deadweight loss. In this case, with a tax revenue of $1000 per month from a $5 per widget tax and an equilibrium quantity of 250 widgets, the new quantity sold after the tax is 200 widgets (since $1000/$5 per widget equals 200 widgets sold).

Deadweight loss is calculated as the loss in total surplus not gained by either consumers, producers, or the government due to the tax. Since the tax creates a price wedge resulting in a lower quantity sold (from 250 to 200), there is some lost surplus. If we were provided with the specific demand and supply curve equations or graph information, we could use the change in consumer and producer surplus to calculate the exact deadweight loss. Unfortunately, without such details, we can't perform an exact calculation but we know there is a deadweight loss because the quantity sold is reduced from the equilibrium quantity due to the tax.