Suppose that Kara values a hot fudge sundae at $6 and Stacia values one at $5 . The pretax price of a hot fudge sundae is $3 . The government imposes a $1 tax on hot fudge sundaes, which raises the price to $4 . What is the deadweight loss from the tax?
Prior to the tax, consumer surplus was $5 -- $3 for Kara ($6-$3) and $2 for Stacia ($5-$3). After the tax, consumer surplus shrinks to $3 -- $2 for Kara ($6-$4) and $1 for Stacia ($5-$4), but tax revenue increases by $2 ($1 from Kara and $1 from Stacia). Deadweight loss is $0 because $5-$3-$2=$0 . Said another way, the loss in consumer surplus equals the tax revenue raised.
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