The deadweight loss from taxation can be determined by:
subtracting the efficient level producer surplus from the producer surplus associated with less output.
subtracting the consumer surplus from the producer surplus associated with less output
summing the consumer and producer surplus associated with less output
summing the change in the total consumer and producer surplus, and the change in government revenue, from moving from the efficient level of output to the lower output.
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Concept Clarifier: Tax
The demand and supply for an unhealthy energy drink are given in the following diagram. Prices are in dollars and quantities are in hundreds of units. The government imposes a $1 tax on the purchase of a unit of this energy drink, paid for by the consumers at the time of the transaction.
Buyers pay ________ tax on each energy drink
Sellers pay ________ tax on each energy drink
Practice: Tax Burden
Practice: Deadweight Loss
Yasmine pays Larry $40 per week for housekeeping. The government levies a $5 tax on housekeeping and Larry raises his price to $45. Yasmine continues to hire him once a week at this higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?
Suppose you are a politician that wants to tax a product. You are hoping to increase the government's tax revenue as much as possible, while minimizing the deadweight loss. You would prefer to do this on goods with __________ elasticities of demand and __________ elasticities of supply.
Cigarettes have a downward sloping demand and an upward sloping supply curve. When the tax is increased from $4 per pack to $6 per pack, what would happen to the government's tax revenue?