Answer to Question #172766 in Microeconomics for Deepti aggarwal

Question

Define dead weight loss of a tax. How do the elasticities of supply and demand affect the deadweight loss of a tax?

Answer 1

Dead weight loss of taxation measures the overall economic loss caused by a new tax on a product or service. It analyses the decrease in production and the decline in demand caused by the imposition of a tax.

The dead weight loss is larger when the supply or demand curve is more elastic. A tax has a dead weight loss because it induces buyers and sellers to change their behavior, because the price changes. Hence, the greater the elasticities of supply and demand, the greater is the dead weight loss of a tax.