Suppose Jack values an ice cream sundae at $4.Dianne values an ice cream sundae at $6.The pre-tax price of an ice cream sundae is $2.The government imposes a "fat tax" of $3 on each ice cream sundae,and the price rises to $5.The deadweight loss from the tax is
A) $4, and the deadweight loss comes from both Jack and Dianne.
B) $4, and the deadweight loss comes only from Jack because he does not buy a sundae after the tax.
C) $2, and the deadweight loss comes from both Jack and Dianne.
D) $2, and the deadweight loss comes only from Jack because he does not buy a sundae after the tax.

Question

Quizplus · Accepted Answer

The deadweight loss is the loss of consumer and/or producer surplus that results from the tax. In this case, Jack values the sundae at $4 but has to pay $5 after the tax, so he will not buy the sundae. This results in a deadweight loss of $2, which only affects Jack because Dianne still buys the sundae at the higher price. Therefore, the answer is D.

Suppose Jack Values an Ice Cream Sundae at $4