Asked by Selia Bennett on May 18, 2024
Verified
Suppose a recent increase in federal gasoline taxes is estimated to cause a $150 million reduction in the total surplus (consumer plus producer surplus) in the gasoline market. If tax revenues increased by $100 million, what is the deadweight loss associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their bicycles to work. How much of the burden of the deadweight loss is incurred by the bicycle riders?
Deadweight Loss
A loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved, leading to a mismatch between supply and demand.
Consumer Surplus
The discrepancy between what consumers are prepared and capable of spending for a product or service and the actual amount they end up paying.
Producer Surplus
The difference between what producers are willing to accept for a good or service versus what they actually receive.
- Understand the concept of deadweight loss in the context of taxation and its impact on surplus.
- Analyze the efficiency and equity of tax systems including their implications for different socioeconomic groups.
Verified Answer
CC
Courtney CallahanMay 22, 2024
Final Answer :
The direct deadweight loss is $50 million. It is impossible to determine how much of the loss is borne by bicycle riders without more information. For example, some of the deadweight loss may be attributable to walkers or people who switched to public transportation.
Learning Objectives
- Understand the concept of deadweight loss in the context of taxation and its impact on surplus.
- Analyze the efficiency and equity of tax systems including their implications for different socioeconomic groups.