Question

Problem:
Using a supply and demand diagram of your own, if a per-unit tax is imposed, the more elastic the supply curve, the:

a. smaller the deadweight loss.
b. larger the deadweight loss.
c. larger the deadweight loss to producers.
d. smaller the deadweight loss to consumers.

Answer:
b. larger the deadweight loss.


Could someone please help me fully understand how to arrive at the answer?

Answer 1

I don't get how increasing the elasticity (=making the before-tax and after-tax supply curves more horizontal) increases the deadweight loss. To me, it seems that making the lines more horizontal only affects the supplier's surplus (but the consumers benefit from it, so it's not a deadweight loss).

Is it only the vertical shifting of the supply curve because of the tax that increases the deadweight loss? It certainly seems that way to me given the new equilibrium is at a lower quantity and higher price compared to the old equilibrium.

Am I right in thinking that's it's only the tax and not the increase in elasticity that increases the deadweight loss in this problem?

Answer 2

I think I've some idea ab it, but could explain what's per-unit tax first? I think in the syllabus I'm learning, we have a different name for it so I don't really understand. Is it a decided amount of tax?

Answer 3

If it is a decided amount of tax added to each unit of the production then we can consider the question in this way, when a tax is added, the ss curve shifts to the left and the distance it moves quals to the tax. If the ss curve is more steep, the triangle(which represents the DL)'s hight gets higher when sharing the same base, so the DL increase.