ECO 108 Lecture Notes - Lecture 12: Deadweight Loss, Breakfast Cereal
3 Aug 2018
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Document Summary
Deadweight loss is like the piece of pie that nobody gets. Deadweight loss represents social gain that could have been produced but wasn"t. The purpose of a sales tax is to raise revenue so the government can do something good for someone. This raises the question of whether some alternative policy might allow the government to do even more good. Unfortunately, the sales tax hurts consumers and producers. Deadweight loss measures a forgone opportunity to do additional good. The government probably does not have an army of trained burglars ready to deploy, and even if they did, burglaries have a way of going horribly wrong. Instead of taxing potatoes, the government could tax oranges, or tax income, or increase rates at the municipal parking lot, or impose a head tax , which requires everyone to pay a flat amount of (say) a year.
