The amount of deadweight loss that results from a tax of a given size is determined by the
A)response of buyers to the tax.
B)number of buyers in the market relative to the number of sellers.
C)price elasticities of demand and supply.
D)ratio of the tax per unit to the effective price received by sellers.

Question

Quizplus · Accepted Answer

The deadweight loss of a tax is affected by the price elasticities of demand and supply. When the tax is imposed, the price of the taxed good or service rises, which reduces demand and supply. The extent to which demand and supply are affected depends on their price elasticities. If demand and supply are highly elastic, then the tax will result in a large deadweight loss. On the other hand, if they are relatively inelastic, then the deadweight loss will be smaller. Therefore, C is the best choice.

The Amount of Deadweight Loss That Results from a Tax