Question

Suppose that the equilibrium quantity in the market for widgets has been 200 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 is able to raise $750 per month in revenue from the tax. What is the deadweight loss from the tax?

Answer 1

The deadweight loss from a tax imposed on widgets, with the government raising $750 per month in revenue and shifts in the prices paid by buyers and received by sellers, is the economic loss due to reduced trades that are neither consumer surplus, producer surplus, nor tax revenue.

Step-by-step explanation:

When a tax of $5 per widget is imposed, the equilibrium quantity changes, causing a deadweight loss. The government raises $750 per month from this tax, indicating that the quantity sold now is 150 widgets (because $750 divided by $5 tax per widget equals 150). Assuming the market was at a steady equilibrium before the tax, we can calculate the deadweight loss by looking at the change in quantity and prices paid by buyers and received by sellers. The initial equilibrium quantity was 200 widgets per month, and after the tax, it's 150 widgets per month.

The sellers bear a higher burden of the tax due to more inelastic supply, while the buyers face a lesser burden due to elastic demand. The deadweight loss, in this case, is the economic loss that isn't captured by either the consumers, the producers, or the government as tax revenue, and it arises because the tax causes the quantity traded in the market to be less than the efficient quantity.