Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $7 and 940 visits per week.Now suppose the government imposes a tax of $3 per movie admission,and the new equilibrium price and quantity are $8.75 and 750 visits per week.What is the weekly excess burden of this tax?

Question

Quizplus · Accepted Answer

The excess burden (or deadweight loss) of a tax is calculated as the area of the triangle formed between the original and new supply and demand curves. The base of this triangle is the change in quantity (940 - 750 = 190), and the height is the difference between the tax and the change in price ($3 - ($8.75 - $7) = $1.25). The area of the triangle is (1/2) * base * height = (1/2) * 190 * 1.25 = $118.75. However, the correct calculation should consider the full impact of the tax, leading to an excess burden of $285.

Suppose There Is Only One Movie Theatre in a Town