Lecture 9/ Chapter 8

Question 1

What determines whether the deadweight loss from a tax is large or small?

Answer 1

The magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price.
That, in turn, depends on the price elasticities of supply and demand.

Question 2

The greater the elasticities of demand and supply:

Answer 2

the larger will be the decline in equilibrium quantity and,

the greater the deadweight loss of a tax.

Question 3

Deadweight Loss

Answer 3

The fall in total surplus that results from a market distortion, such as a tax