The deadweight loss from an excise tax is largest if demand is _____ and supply is _____.

Question

Quizplus · Accepted Answer

The deadweight loss from an excise tax is largest when both demand and supply are elastic, meaning that the quantity demanded and supplied changes significantly in response to a change in price. In this case, the tax causes a large shift in the market equilibrium, leading to a larger deadweight loss. If either demand or supply is inelastic, the quantity demanded or supplied does not change as much in response to a change in price, resulting in a smaller deadweight loss. Therefore, the option D (elastic demand and elastic supply) is the best choice.

The Deadweight Loss from an Excise Tax Is Largest If