Question

Every summer, Matt travels by air to see his grandmother. Matt's willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket.

Suppose that Matt and the airline are the only consumer and producer in this market. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax?

Answer 1

The deadweight loss created by the $50 tax on Matt's airline ticket is $40, which is the difference between his willingness to pay ($260) and the market price before the tax ($250).

Step-by-step explanation:

The question asks to calculate the deadweight loss created by a $50 tax on an airline ticket that raises the ticket price to $270, beyond Matt's willingness to pay. Matt's willingness to pay is $260, and the market price before the tax is $250. With the tax, the price increases to $300 ($250 + $50 tax), making it higher than what Matt is willing to pay, so he does not purchase the ticket. The deadweight loss is the value of the trade that does not occur due to the tax. In this case, the deadweight loss is the surplus that would have been generated from Matt's purchase, which is the area between his willingness to pay ($260) and the market price with tax ($300). So, the deadweight loss is $40 ($260 - $250 market price before tax).