Suppose Hillary values a large order of French fries at $4. Bill values a large order of French fries at $7. The pre-tax price of a large order of French fries is $2. The government imposes a "fat tax" of $3 on each large order of French fries, and the price rises to $5. The deadweight loss from the tax is
A)$4, and the deadweight loss comes from both Hillary and Bill.
B)$4, and the deadweight loss comes only from Hillary because she does not buy a large French fries after the tax.
C)$2, and the deadweight loss comes from both Hillary and Bill.
D)$2, and the deadweight loss comes only from Hillary because she does not buy a large French fries after the tax.

Question

Quizplus · Accepted Answer

The deadweight loss is the loss of economic efficiency caused by the tax, and it is measured as the difference between the amount of economic surplus before the tax and the amount of economic surplus after the tax. In this case, before the tax, both Hillary and Bill would purchase a large order of French fries and gain a total surplus of $5 ($4 for Hillary and $1 for Bill). After the tax, Hillary's surplus would decrease to $2 (the post-tax price of $5 minus her value of $4), and Bill would still have a surplus of $1. Therefore, the deadweight loss is the difference between the total surplus before the tax ($5) and the total surplus after the tax ($3), which is $2. Since Hillary does not buy a large order of French fries after the tax, she experiences a loss of consumer surplus ($2) and is responsible for the entire deadweight loss. Bill, on the other hand, still buys a large order of French fries and does not experience a loss of consumer surplus, so he is not responsible for any deadweight loss.

Suppose Hillary Values a Large Order of French Fries at $4