Tax Problem. Consider a perfectly competitive market were demand is Q = 100 - P and Supply is
Q = P - 10.

-Refer to Tax Problem.The deadweight loss due to a $10 per unit consumption tax is

Question

Tax Problem. Consider a perfectly competitive market were demand is Q = 100 - P and Supply is 
Q = P - 10.

-Refer to Tax Problem.The deadweight loss due to a $10 per unit consumption tax is

Quizplus · Accepted Answer

Deadweight loss occurs when a tax is imposed on a market, leading to a decrease in the quantity traded and a loss of economic efficiency. To calculate the deadweight loss, we first find the equilibrium price and quantity without the tax, then determine the new equilibrium with the tax, and finally calculate the area of the triangle that represents the deadweight loss. Without the tax, setting demand equal to supply gives 100 - P = P - 10, solving for P gives P = 55, and Q = 45. With a $10 tax, the new supply equation becomes Q = P - 20 (since suppliers will only supply at a price that is $10 higher than before to cover the tax). Setting the new supply equal to demand gives 100 - P = P - 20, solving for P gives P = 60 (but this is the price consumers pay; suppliers receive P - 10 = 50), and Q = 40. The deadweight loss is calculated as 0.5 * $10 tax * (45 - 40) units = $25.