Every summer, Matt travels by air to see his grandmother. Matt’s willingness to pay for an...

Every summer, Matt travels by air to see his grandmother. Matt’s willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket. Suppose that Matt and the airline are the only consumer and producer in this market. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax?

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Expert Solution

Since there is a tax there is no demand of airline. It means the willingness to pay of $260 and the minimum acceptable supply price of $100 is gone. The difference of these two would be the deadweight loss.

Deadweight loss = Willingness to pay – Minimum acceptable supply price

= $260 - $100

= $160

Rahul Sunny answered 1 year ago

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