Deadweight loss of the excise tax

Deadweight loss is the surplus on trades that used to happen and no longer do.

Before the tax, Q0 units changed hands at point K. After it, only Q1 units sell. For each of the units between Q1 and Q0, a buyer valued it more than it cost a seller to make: on that stretch the demand curve sits above the original supply curve. Those trades would have created surplus, but the tax makes them not worth doing.

The lost surplus is the triangle between demand and the original supply, from Q1 out to Q0. Its corners are G on demand, I on the original supply, and K where they meet. So the deadweight loss is GKI.

Each choice

• A. This is the slice of tax revenue that comes from buyers. It is a transfer from consumers to the government, not a loss to society.
• B. This is the whole loss of consumer surplus. Most of it goes to the government as tax revenue; only the triangle at the end is lost to everyone.
• C. GHK is only the upper part of the deadweight loss, the part consumers lose. Producers also lose surplus on the units between Q1 and Q0, the triangle below it.
• D (correct). The triangle between demand and the original supply, from Q1 to Q0, is the surplus from trades the tax prevents.
• E. A tax would be a pure transfer only if quantity did not change. Here quantity falls from Q0 to Q1, so trades are lost.