Figure 8-6

-Refer to Figure 8-6.What is the amount of deadweight loss in this market resulting from the levying of the tax on the buyer
A)$20
B)$30
C)$40
D)$50

Question

Figure 8-6
 
-Refer to Figure 8-6.What is the amount of deadweight loss in this market resulting from the levying of the tax on the buyer
A)$20 
B)$30 
C)$40 
D)$50

Quizplus · Accepted Answer

Deadweight loss is a measure of the inefficiency of a market, which results from missing out mutually beneficial trades between buyers and sellers due to a tax or any other market distortion. Thus, deadweight loss is a loss of consumer surplus and producer surplus.
In this case, the vertical distance between the supply and demand curves at the quantity level of 10 units indicates the size of the tax, which is $10. As a result of the tax, the equilibrium quantity declines from 15 units to 10 units, and the equilibrium price received by sellers falls from $60 to $50, while the equilibrium price paid by buyers rises from $60 to $70. Therefore, the loss of consumer surplus is equal to the area of the trapezoid bounded by the demand curve, the post-tax price line, and vertical lines drawn from the quantities of 15 units and 10 units. Similarly, the loss of producer surplus is equal to the area of the trapezoid bounded by the supply curve, the post-tax price line, and the same vertical lines. Adding up these areas gives the overall deadweight loss, which is $40. Therefore, the correct answer choice is (C).

Figure 8-6 -Refer to Figure 8-6.What Is the Amount of Deadweight Loss