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What are deadweight losses, and what are their causes?

What are the market effects of a deadweight loss?

What are the major factors that determine who will bear the burden of a tax or the incidence of a tax?

If the government uses taxation to deal with a situation, how would the various elasticities of supply and demand affect the deadweight loss of that tax? Explain using examples.

If the government proposes the use of cap and tax programs to deal with deadweight losses, how would they work?

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Yusra Anees
Yusra AneesLv10
28 Sep 2019

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Related questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

The market for packets of cigarettes has been described by the following supply and demand functions:

Supply: P = 10 + 4Q Demand: P = 100 - 5Q where P is the price in dollars and Q is the quantity of packets of cigarettes per month (in thousands).

Part A) Construct a graph of supply and demand for this market showing all intercepts. What are the equilibrium prices and quantities? Show these on your graph.

Part B) At the market equilibrium price, what would be the total monthly revenue?

Part C) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part D) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram.

Part E) Assume that a per-unit tax of $9.00 per packet of cigarettes is imposed by the government on the suppliers of cigarettes. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 4Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive?

Part F) How much is the government revenue from the tax on suppliers?

Part G) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents.

Part H) Now assume that instead of imposing a per-unit tax of $9.00 per pack on the suppliers of cigarettes the government decides to apply the same per-unit tax of $9.00 on consumers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 91 - 5Q) What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)

Part I) How much is the government revenue from the tax on consumers? (1 mark)

Part J) Who bears the greatest burden of the tax in each case, producers or consumers? Does your answer depend on whether the tax is levied on producers or consumers?

I am really having difficulty understanding Part J - can that please be answered with some detail?

The residents of Rental City all own their own plot of land, but rent mobile homes. The demand for mobile homes has an elasticity of zero at 2,000 homes. The supply of mobile homes for rent is infinitely inelastic at a rate of $8,000 per year. The town council of Rental City introduces a property tax on the rental mobile homes. The tax is $1,000 per year payable by the rental company.a) How many acres are rented? Explain.  What is the market rent of an acre?  Explain.

b) Suppose the city imposes a land tax of $40 per acre that by statute falls on the renter.  What happens to the gross rent per acre?  To the net rent per acre?  What happens to the total number of acres rented?  Explain.  How much tax is collected?

c) Given your answers to (b), what are the effects of the land tax on the welfare of mobile home residents (i.e. what happens to their consumer’s surplus)?  Be quantitative.  Explain.

d) Given your answers to (b) and (c) what are the effects of the land tax on the welfare of the absentee land owners (i.e. what happens to their producer’s surplus)?  Be quantitative.  Explain.

e) Given your answers to (b), (c) and (d) is the land market efficient after the tax is imposed (i.e. is there a deadweight loss associated with the tax)?  Explain.

f) On whom does the economic incidence of the tax fall?  Explain.

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