Explain deadweight loss and why it occurs. How can an equal tax placed on two different items result in a different amount of deadweight loss?
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It represents the lost economic welfare that occurs when the quantity of a good or service traded is reduced from the optimal level due to factors such as taxes, subsidies, or price controls. Show more…
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Example of Deadweight loss with explanation
Haricharan G.
Explain why deadweight losses occur when taxes are imposed. Give an example showing this by using the Malik and Mei
Chandra J.
The graph shows the market for tires. Suppose that a $12 road-use tax is placed on each tire sold. 1.1. On the graph, locate consumer surplus, producer surplus, tax revenue, and the deadweight loss. 1.2. Why is there a deadweight loss in the market for tires after the tax is imposed? 1.3. What is the value of the tax revenue collected by the government? Why wasn't the government able to collect $12 per tire on 60 tires sold (the original equilibrium quantity)? 1.4. What is the value of the tax revenue collected from the buyers? What is the value of the tax revenue collected from the sellers? Did the burden of the tax fall more heavily on the buyers or the sellers? Why? 1.5. Suppose over time, buyers of tires are able to substitute away from auto tires (they walk and ride bicycles). Because of this, their demand for tires becomes more elastic. What will happen to the size of the deadweight loss in the market for tires? Why?
William F.
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