Question

Describe a situation where taxes do not create a dead weight loss. Use words and a graph to explain . This is an intro class be act like I do not understand the topic fully so explain as thoroughly as you can.

Answer 1

Tax is the amount of money collected by the government from the people or from the firms or companies. Government generally collects certain percentage of our income or profit as tax.

Dead weight loss is the loss of the overall welfare of the economy which is created by the reduction in the consumption of goods and services by the people when the price of goods rises due to imposition of a tax. Whenever a tax is imposed it raises the price of goods or decreases the income of the consumer and hence decreases the overall consumption level.

Elasticity of demand or supply is the responsiveness of the demand and supply with a change in price of the goods and services. The demand for a good or service is said to be elastic if the demand changes with a change in price. May increase or decrease and hence positive or negative elastic.

Since the demand and supply of goods and services is related to the elasticity and hence the Dead weight loss is also related to the elasticity of demand and supply. If the demand and/or supply is more elastic there is higher dead weight loss due to a tax and vice versa.

So the only case possible where taxes do not create a dead weight loss is the situation where demand or supply is perfectly inelastic, this means that the demand or supply does not change when there is change in price. So if due to rise in price due to imposition of tax the demand or supply do not change, there is no dead weight loss due to taxation.

This can be seen graphically as -

From the first graph it can be seen that when the demand and supply is elastic than there is dead weight loss represented by the triangle. But when there there is perfectly inelastic demand or supply as shown in fig. 2, there can't be any dead weight loss as the demand and supply does not depend on price.