A good can be produced in a competitive industry at a cost...

A good can be produced in a competitive industry at a cost of $\$ 10$ per unit. There are 100 consumers are each willing to pay $\$ 12$ each to consume a single unit of the good (additional units have no value to them.) What is the equilibrium price and quantity sold? The government imposes a tax of $\$ 1$ on the good. What is the deadweight loss of this tax?

Key Concepts

Deadweight Loss

Deadweight loss is the loss of total surplus that occurs when market transactions are reduced due to external interventions like a tax. It represents the efficiency loss as some mutually beneficial trades no longer occur. The measure of deadweight loss helps assess the overall welfare cost imposed by market distortions.

Tax Incidence

Tax incidence refers to how the burden of a tax is distributed between buyers and sellers. In markets with perfectly elastic supply or fixed demand conditions, the tax burden may fall entirely on one side of the market. Understanding this concept is critical when evaluating how a new tax affects market prices and seller revenues.

Marginal Cost and Constant Cost Production

Marginal cost represents the additional cost of producing one more unit of a good. In cases of constant marginal cost, the supply curve is horizontal, meaning that the firm is willing to sell any quantity at that cost, which simplifies the analysis of equilibrium outcomes in competitive markets.

Competitive Equilibrium

In a competitive market, firms produce where the price equals the marginal cost of production. This equilibrium is determined by the intersection of the supply and demand curves, ensuring that the quantity supplied equals the quantity demanded while firms earn zero economic profit in the long run.

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