Suppose Yolanda needs a dog sitter so that she can travel to her sister's wedding. Yolanda values dog sitting for the weekend at $200. Rebecca is willing to dog sit for Yolanda so long as she receives at least $175. Yolanda and Rebecca agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?
A)The maximum value that Yolanda would pay for dog sitting
B)The $30 tax
C)The lost benefit to Yolanda and Rebecca because after the tax, Rebecca will not dog sit for Yolanda
D)The lost benefit to Yolanda of being unable to hire a dog sitter because Yolanda is the one who would pay the tax

Question

Quizplus · Accepted Answer

The deadweight loss of the tax is the lost benefit to both Yolanda and Rebecca because, after the tax, the cost of dog sitting becomes too high for the agreement to occur. Yolanda values the service at $200, and Rebecca requires at least $175. With a $30 tax, the minimum Rebecca would need to receive to provide the service would be $205 ($175 + $30 tax), which is more than Yolanda's valuation, thus preventing the transaction and creating a deadweight loss.

Suppose Yolanda Needs a Dog Sitter So That She Can