Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is:

• A. the difference between consumer surplus and producer surplus after the tax
• B. the area under the demand curve for all units sold after the tax
• C. the area between the supply and demand curves over the units that are no longer traded due to the tax
• D. the total tax revenue collected by the government

Answer: (C)

Verified step by step guidance

1. Understand that deadweight loss (DWL) from a tax represents the loss of total surplus that occurs because the tax reduces the quantity traded below the efficient market equilibrium quantity.
2. Identify the original equilibrium quantity and price before the tax, where the supply and demand curves intersect.
3. Determine the new quantity traded after the tax is imposed, which is lower than the original equilibrium quantity due to the tax increasing the price buyers pay and lowering the price sellers receive.
4. Recognize that the deadweight loss is the area between the supply and demand curves over the range of quantities that are no longer traded because of the tax; this area forms a triangle between the original and new quantities.
5. Calculate the deadweight loss by finding the area of this triangle, which can be done using the formula for the area of a triangle: \(\text{DWL} = \frac{1}{2} \times \text{(quantity reduction)} \times \text{(difference between supply and demand prices at that quantity)}\).