The Deadweight Loss Pric Lost gains from trade Supply PB Price =P1 Size of tax: without tax ■■国口■口■国 s… Cost to selers Demand Value to buyers 0 Q 1 Quantit Reduction in quantity due to the tax
The Deadweight Loss... 0 Quantity Price Demand Supply Q1 PB Price = P1 without tax PS Q2 Size of tax Lost gains from trade Cost to sellers Value to buyers Reduction in quantity due to the tax
Determinants of Deadweight Loss What determines whether the deadweight loss from a tax is small or large? 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
Determinants of Deadweight Loss • What determines whether the deadweight loss from a tax is small or large? • 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