Suppose that Deon places a $150 value on a new MP-3 player, and Juanita places a $140 value on it. The cost of the MP-3 player is $130 . Suppose the government levies a $15 tax on MP-3 players, which raises the price to $145 . What is the deadweight loss created by the tax?
Before the tax, the total surplus was $30 ($150-$130=$20 for Deon + $140-$130=$10 for Juanita). After the tax, the consumer surplus is $5 ($150-$145 for Deon; Juanita does not purchase the MP-3 player). The government raises $15 in tax revenues by selling one player to Deon. Tax revenue rises by $15, but consumer surplus falls by $25 ($30-$5), so the deadweight loss is $10.
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