Question

T/F/U. Taxes that can be avoided will not have deadweight loss. In your answer, explain what various tax structures will increase or decrease deadweight loss. Also, provide examples of what deadweight loss actually is

Answer 1

The size of the deadweight loss is likely to be maximum where producer and consumer actions are greatly reactive to after tax prices. Consequently, deadweight loss is determined by the elasticities of supply and demand. Thus the rise or decline in deadwood is determined by how much a tax alters the market outcome. In other words, the more elasticities of supply and demand will result in more deadweight loss from a tax and lesser elasticities of supply and demand will result in lesser deadweight loss from a tax.

                                                                          Examples of what deadweight loss Price ceilings, price floors and taxes as they modify the supply and demand of a good by way of price manipulation. Drop in aggregate surplus which results due to market distortion is termed as deadweight loss.