Question

If the tax on a good is increased from $0.30 per unit to $0.90 per unit, the deadweight loss from the tax

Select one:

a. remains constant.

b. increases by a factor of 4.

c. increases by a factor of 9.

d. increases by a factor of 16.

Answer 1

The deadweight loss is the area of triangle between new and old supply curves which represents an additional cost on the society.

A tax increase from 0.3 to 0.9 will shift the supply curve to left in a parallel direction so that if we take two points, one on new supply curve and one on old supply curve then the difference comes out to be exactly 0.9

A 3times increase in the tax will increase the deadweight loss by the square of the increase in tax

So, deadweight loss will increase by factor = 3* 3 = 9

So, Option c. is correct