Question

What is the value of the excess burden of the tax (deadweight loss)?

What is the value of the excess burden of the tax (deadweight loss)?

Homework Answers

Answer #1

Dead weight loss is the loss of total welfare or social surplus due to taxation. The excess burden of taxation is the efficiency cost, or deadweight loss, associated with taxation.  

Deadweight loss = 1/2 x ( P2 - P1) x (Q1 - Q2)

It measures the decrease in supply and the decline in demand caused by the imposition of a tax. it is lost opportunity cost. Tax result in increased cost of production or a increased price for the consumer which in turn causes a lower production volume and low demand. The gap between the taxed and tax-free production volumes is the deadweight loss.

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