8.2 The Determinants of the Deadweight Loss

8.2 The Determinants of the Deadweight Loss

The amount of the deadweight loss varies with both demand elasticity and supply elasticity. When either demand or supply is inelastic, then the deadweight loss of taxation is smaller, because the quantity bought or sold varies less with price. With perfect inelasticity, there is no deadweight loss. However, deadweight loss increases proportionately to the elasticity of either supply or demand. ^[3]

Example: The demand for beer is more elastic than milk. The deadweight loss would be more from a tax on beer than a tax on milk.

^{Taxes and Perfectly Elastic Demand  [4]}