The current price of compact discs, which are traded in perfectly competitive markets, is $10.A $1 per unit tax is levied on the discs.Annual record sales decline from five million to four million as a result of the tax.Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:

Question

Quizplus · Accepted Answer

The excess burden (or deadweight loss) of a tax is calculated as 0.5 * (change in quantity) * (tax per unit). Here, the change in quantity is 1 million (5 million - 4 million), and the tax per unit is $1. Thus, the excess burden is 0.5 * 1 million * $1 = $500,000 per year.

The Current Price of Compact Discs, Which Are Traded in Perfectly