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

Quizplus · Accepted Answer

The deadweight loss (DWL) is equal to the area between the true demand curve and the new supply curve (including the tax). In this case, the true demand curve is steeper than the estimated demand curve used by the government, meaning that the quantity demanded will fall by a larger proportion than anticipated. As a result, the new equilibrium quantity will be lower than it would be without the tax. The DWL will be the triangular area between the true demand curve, the new supply curve (including the tax), and the vertical axis, which is given by (1/2) x (10-5) x (20-15) = 2.5. Therefore, the correct answer is D.

Return to the Market for Cigarettes from the Previous Questions