Monday, July 18, 2011

Deadweight loss question?

The key is in the definition of the long run vs. the short run. In the long run, all demand is elastic. When demand is inelastic, most of the tax burden ends up falling on the consumer (regardless of where the tax is actually imposed.) Inelastic demands cause low deadweight losses in the short run, but as the demand becomes more elastic in the long run the deadweight loss will go up.

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