Question

Suppose a market with supply function X=p/6, where X is quantity and p price. The demand is infinitely inelastic at X=2.5. The government establishes a specific tax of 2€ per unit. The consumers are supposed to pay the tax.

What is the deadweight-loss associated with this tax?

Select one:

a.  DWL is 2.5

b. DWL is 1.25

c. DWL is 5

d. DWL cannot be calculated using the available information

e.  DWL is 0

Answer 1

Here in the question it has been mentioned that the demand is infinitely inelastic at X= 2.5.

It means that the full burden of the tax is borne by the consumers irrespective of on whom the tax is imposed. Moreover since the demand is infinitely inelastic there is no change in the quantity in the market after the tax is imposed. As a result of no change in quantity in the market, there is no Dead weight loss.

Hence, deadweight loss associated with this tax is 0

Therefore, option e is correct. i.e, DWL is 0.