Figur

suppv

SUA ot te*

-r-Ccrato

buytr* I

Tin? area of Ihe triangle between Ihe supply and demand curves (area C + E in Figure 3) measures these losses. This conclusion can be seen more easily in Figure 4 by retailing that the demand curve reflects the value of the good to consumers and that the supply curve reflects the costs of producers. When the tax raises the price to buyers to P„and lowers the price lo sellers to Pu the marginal buyers and sellers leave the market, so the quantity sold falls from Q, to Yet as the figure shows, the value of the good to these buyers still exceeds the cost to these sellers. At every quantity between Qt and Q:, the situation is the same as in our example with Joe and Jane. The gains from trade—the difference between buyers' value and sellers' cost -are less than the tax. As a result, these trades are not made once the tax is imposed. The deadweight loss is the surplus lost because the tax discourages these mutually advantageous trades.

QUICK QUIZ Draw the supply and demand curves for cookies. If tho govornmen: imposes a tax on cookie», »how what happens to the price paid by buyers, the price received by sellers, and the quantity sold. In your diagram, show the deadweight loss from the tax. Explain the meaning of the deadweight loss.

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