The supply curve for liquor is the typical upward-sloping straight line,and the demand curve for liquor is the typical downward-sloping straight line.When liquor is taxed,the area on the relevant supply-and-demand graph that represents the deadweight loss is
A) larger than the area that represents consumer surplus in the absence of the tax.
B) larger than the area that represents government's tax revenue.
C) a triangle.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

When a tax is imposed on a good, the price paid by consumers increases, and the price received by producers decreases. As a result, the quantity demanded and supplied reduces, and the deadweight loss is the area between the new supply and demand curves and the free-market equilibrium quantity. The deadweight loss is a triangle, and it represents the inefficiency created when the tax alters the natural market outcome. It arises because some mutually beneficial transactions that would have occurred in the absence of the tax no longer take place. The deadweight loss is smaller than the revenue earned by the government and the decrease in consumer surplus because it is only the loss that occurs because of the tax-induced distortion in the market. Therefore, option C is correct.

The Supply Curve for Liquor Is the Typical Upward-Sloping Straight