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How Taxes Impact Efficiency: Deadweight Losses

Taxation and Deadweight Loss

Taxation and Deadweight Loss

Taxation can be evaluated as a non-market cost. In this case imposition of taxes reduces supply, resulting in the creation of deadweight loss (triangle bounded by the demand curve and the vertical line representing the after-tax quantity supplied), similar to a binding constraint.

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Related Terms

  • Pareto optimal
  • deadweight loss
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