With this new tax price, there would be a deadweight loss: As illustrated in the graph, deadweight loss is the value of the trades that are not made due to the tax. The blue area does not occur because of the new tax price. Therefore, no exchanges take place in that region, and dea...
How to Calculate Deadweight Loss Deadweight Loss Graph Deadweight Loss Graph In the graph above, the yellow triangle is representative of the deadweight loss. Deadweight Loss Formula The formula for deadweight loss is as follows: Deadweight Loss = ½ * (P2 – P1) x (Q1 – Q2) Here’s wha...
To see why this deadweight loss occurs, look at the supply and demand curves in the graph below. When a market transaction is taxed, the buyer pays a higher price and the seller receives a lower price. This lowers demand, which shifts the buyer's equilibrium from the market price (Pm) ...