The deadweight loss from a $1 tax will be smallest in a market with

Question

Quizplus · Accepted Answer

When both supply and demand are inelastic, the market is likely to have a small but positive deadweight loss because both buyers and sellers have limited options to adjust to the tax. In contrast, when one or both curves are elastic, the deadweight loss is likely to be larger since the tax will distort trade more severely and change the quantity traded more significantly. Therefore, B is the best choice since it implies the smallest deadweight loss among the four options.

The Deadweight Loss from a $1 Tax Will Be Smallest