After the government imposes an excise tax on a market, what does the amount of deadweight loss represent?

• A. The increase in producer surplus resulting from the tax
• B. The total tax revenue collected by the government
• C. The sum of consumer and producer surplus after the tax is imposed
• D. The reduction in total surplus due to trades that no longer occur because of the tax

Answer: (D)

Verified step by step guidance

1. Understand that deadweight loss (DWL) in microeconomics refers to the loss of total surplus that occurs when the market is not operating at its efficient equilibrium due to a distortion, such as a tax.
2. Recognize that an excise tax increases the price buyers pay and decreases the price sellers receive, which reduces the quantity traded below the efficient market equilibrium quantity.
3. Identify that the reduction in quantity traded means some mutually beneficial trades between buyers and sellers no longer happen, causing a loss in total surplus (the sum of consumer and producer surplus).
4. Note that the deadweight loss represents this lost surplus from trades that do not occur because the tax makes them unprofitable or undesirable for either party.
5. Conclude that deadweight loss is not the tax revenue collected or changes in producer surplus alone, but specifically the reduction in total surplus due to the decrease in trade volume caused by the tax.