Asked by Trevor Debelak on May 01, 2024
Verified
Suppose that Deon places a $150 value on a new MP-3 player, and Juanita places a $140 value on it. The cost of the MP-3 player is $130. Suppose the government levies a $15 tax on MP-3 players, which raises the price to $145. What is the deadweight loss created by the tax?
Deadweight Loss
Deadweight loss is a loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved.
MP-3 Player
A portable digital device designed to play audio files in the MP3 format, allowing for the storage and playback of music and other audio.
Tax
A compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions.
- Analyze the impact of taxes on market activities and calculate the deadweight loss resulting from taxation.
Verified Answer
ZK
Zybrea KnightMay 03, 2024
Final Answer :
Before the tax, the total surplus was $30 ($150-$130=$20 for Deon + $140-$130=$10 for Juanita). After the tax, the consumer surplus is $5 ($150-$145 for Deon; Juanita does not purchase the MP-3 player). The government raises $15 in tax revenues by selling one player to Deon. Tax revenue rises by $15, but consumer surplus falls by $25 ($30-$5), so the deadweight loss is $10.
Learning Objectives
- Analyze the impact of taxes on market activities and calculate the deadweight loss resulting from taxation.