Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is
A)$250.
B)$500.
C)$750.
D)$1,000.

Question

Quizplus · Accepted Answer

The deadweight loss from the tax is the total loss in welfare (consumer surplus + producer surplus) that is not offset by tax revenue. The decrease in consumer surplus is $450, and the decrease in producer surplus is $300, making a total loss of $750. However, the government collects $5 per unit on 100 units, which equals $500 in tax revenue. The deadweight loss is the total loss minus the tax revenue: $750 - $500 = $250.

Suppose a Tax of $5 Per Unit Is Imposed on a Good