Comparison of Total Surplus Before and After the Salt Tax (Figure 8.24)

Market Intervention Analysis

Consider a competitive market for a specific good, initially operating at an equilibrium where the quantity traded maximizes the sum of consumer and producer surplus. A government then imposes a binding price ceiling, setting the maximum legal price below the original equilibrium price. How does this intervention affect the total surplus in the market?

Analysis of Deadweight Loss from a Tax

Explaining the Source of Deadweight Loss

A per-unit tax is imposed on a good for which consumer demand is perfectly inelastic. This tax will create a deadweight loss because it raises the price for consumers.

Match each market intervention with its resulting market outcome, assuming the intervention is binding and the market was initially in a competitive equilibrium.

The following graph illustrates a competitive market where a per-unit tax has been imposed. The original equilibrium was at point E. After the tax, the quantity traded falls to Qt, the price consumers pay rises to Pc, and the price producers receive falls to Pp. Based on the labeled points on the graph, which area represents the total deadweight loss created by the tax?

Calculating Deadweight Loss from a Tax

In a market for a specific product, the equilibrium price is $50 and the equilibrium quantity is 1,000 units. The government imposes a binding price floor of $60. At this new price, consumers are only willing to buy 800 units. The loss in total economic surplus resulting from the 200 units that are no longer bought or sold is known as __________.

A government plans to impose a per-unit tax of the same size on one of two separate markets: the market for insulin (a life-saving medication for diabetics) or the market for luxury sports cars. Assuming all other market characteristics are similar, in which market would the tax create a larger deadweight loss?

Pricing Above Marginal Cost as a Source of Pareto Inefficiency

Deadweight Loss from Private Provision of Excludable Min's Music (Figure 10.8)