Question

A per-unit tax imposed on suppliers will shift the supply curve up by the amount of the tax.

Illustrate the deadweight loss from the tax

Answer 1

$P_0$ and $Q_0$ are the equilibrium price and quantity before the imposition of tax, respectively, as seen in the graph above. With the tax, the supply curve shifts from Supply 0Supply 0 to Supply 1.Supply 1 by the tax amount.

Because of the tax, businesses would want to supply less.

The buyer's price would increase from $P_0$ to $P_1$ and the seller would receive a lower price for the good from $P_0$ to $P_2$ . Due to this tax, producers supply less from $Q_0$ to $Q_1$ .

The blue traingle represents dead weight reduction, which may be calculated as:

Dead weight loss$=\frac{1}{2}\times(P_2-P_1)\times(Q_0-Q_1)$