Question

1. is the relationship between a change in the size of a tax and the change in the deadweight loss of the tax?

Answer 1

The relationship between change in the size of tax and change in the deadweight Loss of the tax is positive. This means that if there is an increase in size of tax, there will be an increase in Deadweight loss of tax. This is illustrated by the following expression showing the relationship between Size of tax and Deadweight Loss from tax.

DW= 0.5(dt/P0)2 {(ED×ES)/(ES–ED)} P0Q0

where DW is the Deadweight Loss of tax

dt is the size of tax.

ED is the price Elasticity of Demand

ES is the price Elasticity of Supply

P0 is intial equilibrium price of the good

Q0 is the initial equilibrium quantity of the good.