page_title: Tax wedge
section_title: Deadweight loss
hierarchical_section_title: Tax wedge / Implications of a tax wedge / Deadweight loss
caption_attribution_description: English: A graph of a tax wedge with an inelastic demand curve. This graph demonstrates that in this case, the consumer will bear more of the tax.
context_page_description: The tax wedge is the deviation from the equilibrium price/quantity as a result of the taxation of a good. Because of the tax, consumers pay more for the good than they did before the tax, and suppliers receive less for the good than they did before the tax. Put differently, the tax wedge is the difference between what consumers pay and what producers receive from a transaction. The tax effectively drives a "wedge" between the price consumers pay and the price producers receive for a product.
  Following from the Law of Supply and Demand, as the price to consumers increases, and the price received by suppliers decreases, the quantity that each wishes to trade will decrease. After a tax is introduced, a new equilibrium is reached, where consumers pay more, suppliers receive less, and the quantity exchanged falls. The difference between and will be equivalent to the size of the per-unit tax.
context_section_description: The filled-in "wedge" created by a tax actually represents the amount of deadweight loss created by the tax. Deadweight loss is the reduction in social efficiency (producer and consumer surplus) from preventing trades for which benefits exceed costs. Deadweight loss occurs with a tax because a higher price for consumers, and a lower price received by suppliers, reduces the quantity of the good sold. Thus, the equilibrium quantity of a taxed good is lower than the equilibrium quantity when the same good is not taxed. The deadweight loss created by the tax is equal to , represented by the shaded triangle in the figure.
caption: When demand is more inelastic than supply, consumers bear more of the tax. (Ex. cigarettes)
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