Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and decreases producer surplus by $4,400. The deadweight loss of the tax is

$7,400

Explanation:

Deadweight loss of tax calculates the loss of economic efficiency as a result of taxation.

Deadweight loss = loss in producer surplus + loss in producer surplus

$3,000 + $4,400 = $7,400.

Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.

Producer surplus is the difference between the price of the good and the least price the seller is willing to accept for his good.

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