The dead-weight loss from an excise tax
A)is greater if demand is perfectly inelastic.
B)is caused by a shift in consumer preferences when the tax is raised.
C)is the lost surplus that results from higher prices and lower output resulting from the tax.
D)is of little concern to policy makers since all excise taxes are "sin" taxes.
E)is the difference between consumer surplus and producer surplus.

Question

Quizplus · Accepted Answer

The dead-weight loss from an excise tax is the lost surplus that results from higher prices and lower output resulting from the tax. It occurs because the tax reduces consumer and producer surplus, leading to a reduction in overall welfare. The magnitude of the dead-weight loss depends on the elasticities of demand and supply. If demand is perfectly inelastic (i.e., there is no substitute for the taxed good), the dead-weight loss will be smaller because consumers cannot easily switch to other products, and firms can pass on the tax to consumers.

The Dead-Weight Loss from an Excise Tax