The size of the deadweight loss,or excess burden,of a tax depends on the
A) amount of producer surplus but not the amount of consumer surplus because it is the producers who send the tax revenues to the government.
B) strength of demand.
C) strength of supply.
D) elasticities of demand and supply.
E) number of demanders and the number of suppliers.

Question

Quizplus · Accepted Answer

Deadweight loss, or excess burden, of a tax depends on the elasticities of demand and supply. The more elastic the demand and supply of a good, the greater will be the deadweight loss of the tax. This happens because inelastic demand/supply implies a smaller reduction in quantity demanded/supplied with an increase in price which limits the efficiency costs of a tax.

The Size of the Deadweight Loss,or Excess Burden,of a Tax