Deadweight Loss vs Tax Incidence
Deadweight Loss and Tax Incidence are two Supply & Demand concepts in AP Economics that students often mix up. In short: deadweight loss is deadweight loss is the loss of total surplus that occurs when a market is not at its efficient competitive equilibrium. Meanwhile, tax incidence is tax incidence refers to the distribution of the tax burden between buyers and sellers. Here is how they compare side by side.
Deadweight loss is the loss of total surplus that occurs when a market is not at its efficient competitive equilibrium.
It measures mutually beneficial trades that fail to occur because of a price control, tax, monopoly, or externality. On a supply-and-demand graph it is the triangular area between the demand and supply curves over the units no longer traded. A market is allocatively efficient when deadweight loss is zero.
Tax incidence refers to the distribution of the tax burden between buyers and sellers.
The incidence of a tax depends on the relative elasticities of supply and demand. If demand is more inelastic than supply, consumers bear a larger share of the tax burden. If supply is more inelastic than demand, producers bear a larger share.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime.