Every summer, Matt travels by air to see his grandmother. Matt's maximum willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax?

Question

Quizplus · Accepted Answer

The deadweight loss is the loss of consumer and producer surplus due to the tax. In this case, the consumer surplus is the difference between Matt's maximum willingness to pay ($260) and the market price ($250), which is $10. The producer surplus is the difference between the market price and the minimum price the airline is willing to accept ($100), which is $150. The deadweight loss is the sum of the consumer and producer surplus, which is $160.

Every Summer, Matt Travels by Air to See His Grandmother