Figure 5.11: FIGURE 5-11 Deadweight Loss and Elasticities
Figure 5.11: Demand is elastic in panel (a) and inelastic in panel (b), but the supply curves are the same. Supply is elastic in panel (c) and inelastic in panel (d), but the demand curves are the same. The deadweight losses are larger in panels (a) and (c) than in panels (b) and (d) because the greater the price elasticity of demand or supply, the greater the tax-induced fall in the quantity transacted. In contrast, the lower the price elasticity of demand or supply, the smaller the tax-induced fall in the quantity transacted and the smaller the deadweight loss.