AP MicroeconomicsPublic Finance & Taxation
Excess Burden of Taxation
The excess burden of a tax is the deadweight loss it creates beyond the revenue collected, arising because the tax distorts consumption and production decisions.
A tax drives a wedge between the price buyers pay and sellers receive, shrinking the quantity traded below the efficient level and destroying mutually beneficial transactions. The lost surplus over and above the tax revenue is the excess burden, usually shown as the 'Harberger triangle'. Its size grows with the square of the tax rate and is larger when supply or demand is more elastic, which is why broad, low-rate taxes on inelastic bases are more efficient.
Formula / Example
Excess burden ≈ ½ × t² × (elasticity-weighted base); area of the Harberger triangle = ½ × tax wedge × ΔQ