Return to the market for cigarettes from the previous questions.Suppose the government implements the tax you found in the previous question.But suppose the government is making a mistake.The true demand curve is in fact ,and this is not a result of any behavioral bias.Compute the deadweight loss of the government's tax policy.

Question

Return to the market for cigarettes from the previous questions.Suppose the government implements the tax you found in the previous question.But suppose the government is making a mistake.The true demand curve is in fact  ,and this is not a result of any behavioral bias.Compute the deadweight loss of the government's tax policy.

Quizplus · Accepted Answer

The true demand curve being steeper than the government perceives it to be means that the tax will have a larger effect on reducing the quantity demanded. This leads to a larger deadweight loss as more consumer surplus is lost due to the decrease in quantity demanded. Given the size of the tax, the deadweight loss would be $2,500.

Return to the Market for Cigarettes from the Previous Questions