ECON 102 Lecture Notes - Lecture 14: Deadweight Loss, Demand Curve, Economic Surplus
Document Summary
The loss of deadweight arising from an excise tax occurs because it prohibits any mutually beneficial transactions. The product and consumer surplus forgotten from these lost transactions in particular is equal to the scale of the absence of the deadweight itself. That means the larger the amount of transactions impeded by the tax, the greater the loss of deadweight. This gives us an important indication of the relationship between how elastic or inelastic supply and demand are and the scale of the tax loss of deadweight. Remember that when demand or supply is elastic, the quantity demanded or the quantity supplied is fairly sensitive to the market. Therefore a tax levied on a product for which either demand or supply, or both, is elastic would result in a fairly large decrease in the quantity purchased and sold and a significant loss of deadweight.
