Question

When can a deadweight loss be greatest?
(a) Supply is elastic, and demand is perfectly inelastic
(b) Demand is elastic, and supply is perfectly inelastic
(c) Both supply and demand are relatively inelastic
(d) Both supply and demand are relatively elastic
Answer
A
B
c​

Answer 1

Explanation:

A greater reduction in the quantity exchanged in the market causes a greater deadweight loss. As a result, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax.

Answer 2

Option d is the correct answer.

When both supply and demand are relatively elastic a deadweight loss will be greatest.

Deadweight loss

1. It is a cost that is incurred due to production inefficiency.
2. It is borne by the society.
3. It is incurred when market demand and supply are out of order due to an unplanned market intervention or supply/demand shock.
4. Elasticity of supply and demand determines the dead weight loss.                
5. When demand and supply are relatively elastic more tax can be imposed on the trades. Therefore, deadweight loss will be greatest.