A tax on an industry with a perfectly inelastic demand curve will generate a dead weight loss:
A)greater than the producer's surplus.
B)lower than the producer's surplus.
C)equal to the sum of consumer surplus and producer surplus.
D)equal to zero.

Question

Quizplus · Accepted Answer

A perfectly inelastic demand curve means that the quantity demanded does not change with a change in price. Therefore, the burden of the tax will entirely fall on the producer and will not affect the quantity demanded. The producer's surplus will decrease by the amount of the tax, but there will be no change in consumer surplus. As a result, there will be no dead weight loss, and the answer is D.

A Tax on an Industry with a Perfectly Inelastic Demand