Asked by Jessica Lopez on May 04, 2024
Verified
Suppose Luke values a scoop of Italian gelato at $4. Leia values a scoop of Italian gelato at $6. The pre-tax price of a scoop of Italian gelato is $2. The government imposes a tax of $3 on each scoop of Italian gelato, and the price rises to $5. The deadweight loss from the tax is
A) $4, and the deadweight loss comes from both Luke and Leia.
B) $4, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.
C) $2, and the deadweight loss comes from both Luke and Leia.
D) $2, and the deadweight loss comes only from Luke because he does not buy gelato after the tax.
Deadweight Loss
A loss of economic efficiency that occurs when the optimal quantity of a good is not produced.
Tax
A compulsory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.
- Learn about the effects of taxes on consumer surplus and the production of deadweight loss.
Verified Answer
DN
Dayang NurzawanieMay 10, 2024
Final Answer :
D
Explanation :
The deadweight loss is $2, which comes only from Luke because he values a scoop of gelato at $4, but after the tax, the price is $5, so he does not buy it. Leia still buys the gelato because her valuation ($6) is higher than the post-tax price ($5), so she is not part of the deadweight loss.
Learning Objectives
- Learn about the effects of taxes on consumer surplus and the production of deadweight loss.