(Figure: The Gasoline Market) Use Figure: The Gasoline Market.The pretax equilibrium price is $3,and the equilibrium quantity before tax is 20,000 gallons.An excise tax has been levied on each gallon of gasoline,shifting the supply curve upward.The deadweight loss from this tax is equal to:

A) $1.50.
B) $5,000.
C) $15,000.
D) $4,375.

Question

ALANEY EDWARDS · Accepted Answer

Final Answer : D, Explanation :  The deadweight loss (DWL) equals the area of the triangle formed by the distance between the quantity demanded before and after the tax, the difference between the pretax price and the post-tax price, and the midpoint of the pretax and post-tax prices. Using the given information, the new equilibrium quantity is 16,000 gallons and the new equilibrium price is $3.50. Thus, the DWL is 0.5 x ($3.50 - $3) x (20,000 - 16,000) = $4,375.

Definitions

Learning Objectives

Learning Objectives

Related questions