Microeconomics Quiz: Deadweight Loss As Unifying Welfare Metric
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Deadweight Loss As Unifying Welfare MetricQuestion 1 of 20

A market is characterized by linear demand and supply curves. A government imposes a small per-unit tax, T, which creates a deadweight loss of $50. If the government doubles the tax to 2T, and the tax is not prohibitive, the new deadweight loss will be approximately:

$50
$100
$200
$250
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Microeconomics Quiz: Deadweight Loss As Unifying Welfare Metric

Practice Deadweight Loss As Unifying Welfare Metric in Microeconomics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

A market is characterized by linear demand and supply curves. A government imposes a small per-unit tax, T, which creates a deadweight loss of $50. If the government doubles the tax to 2T, and the tax is not prohibitive, the new deadweight loss will be approximately:

  1. $50
  2. $100
  3. $200 (correct answer)
  4. $250
Explanation: For linear supply and demand curves, the deadweight loss from a tax is proportional to the square of the tax rate. The formula for DWL is 0.5×T×ΔQ0.5 \times T \times \Delta Q. The change in quantity (ΔQ\Delta Q) is also approximately proportional to the tax rate (T). Therefore, DWL∝T×T=T2DWL \propto T \times T = T^2. If the tax T doubles to 2T, the deadweight loss will increase by a factor of 22=42^2 = 4. The new DWL will be (4 \times 50=50 = 200).

Question 2

A market is characterized by the demand curve P=120−QP = 120 - Q and a marginal cost of production given by MC=QMC = Q. If this market operates as a single-price monopoly, what is the deadweight loss compared to the perfectly competitive outcome?

  1. $200
  2. $400 (correct answer)
  3. $800
  4. $1600
Explanation: First, find the competitive outcome where price equals marginal cost (P=MCP = MC): 120−Q=Q⇒2Q=120⇒Qc=60120 - Q = Q \Rightarrow 2Q = 120 \Rightarrow Q_c = 60. The competitive price is Pc=60P_c = 60. Next, find the monopoly outcome. The monopolist's marginal revenue is MR=120−2QMR = 120 - 2Q. The monopolist produces where MR=MCMR = MC: 120−2Q=Q⇒3Q=120⇒Qm=40120 - 2Q = Q \Rightarrow 3Q = 120 \Rightarrow Q_m = 40. The monopoly price is Pm=120−40=80P_m = 120 - 40 = 80. The marginal cost at the monopoly quantity is MC(40)=40MC(40) = 40. The deadweight loss is the area of the triangle defined by the quantity reduction and the divergence between demand (value) and marginal cost. DWL = (0.5 \times (Q_c - Q_m) \times (P_m - MC(Q_m)) = 0.5 \times (60 - 40) \times (80 - 40) = 0.5 \times 20 \times 40 = $400).

Question 3

In a market with a significant negative externality, the unregulated competitive equilibrium results in a deadweight loss of $1,000. To correct for this, the government imposes an optimal Pigouvian tax. What is the deadweight loss immediately after the tax is implemented?

  1. $0 (correct answer)
  2. $500
  3. $1,000
  4. Greater than $1,000
Explanation: A negative externality causes a market to overproduce relative to the social optimum, creating a deadweight loss. An optimal Pigouvian tax is a per-unit tax set exactly equal to the marginal external cost at the socially optimal quantity. The effect of this tax is to internalize the externality, shifting the private marginal cost curve up to align with the social marginal cost curve. This induces the market to produce at the socially efficient quantity, thereby maximizing total surplus and eliminating the pre-existing deadweight loss.

Question 4

A government needs to raise $10 million in revenue. It can do so either through a $1 per-unit tax on gasoline or a $300 lump-sum tax on every household. Assuming no one avoids the lump-sum tax by moving, how do the deadweight losses of these two tax policies compare?

  1. The lump-sum tax creates a larger deadweight loss because it is regressive and falls heavily on the poor.
  2. Both taxes create the same deadweight loss because they raise the same amount of government revenue.
  3. The per-unit tax on gasoline creates a positive deadweight loss, while the lump-sum tax creates no deadweight loss. (correct answer)
  4. The per-unit tax creates a smaller deadweight loss because it is avoidable by those who value gasoline the least.
Explanation: Deadweight loss is created when a tax distorts economic decisions at the margin. A per-unit tax on gasoline increases the marginal cost of driving, causing people to consume less gasoline than the efficient amount, which creates a deadweight loss. A lump-sum tax is unavoidable and its amount does not depend on a person's choices or economic activities. Because it does not change the marginal costs or benefits of any action, it does not distort incentives and thus creates no deadweight loss. It is a pure transfer of wealth.

Question 5

A monopolist produces where marginal cost equals $20 and charges a price of $35. If the government regulates this monopolist to price at marginal cost, consumer surplus increases by $450 and producer surplus decreases by $300. What was the deadweight loss under the unregulated monopoly?

  1. $150, representing the net welfare gain from eliminating the monopoly pricing distortion (correct answer)
  2. $300, equal to the loss in producer surplus since this represents transferred consumer benefits
  3. $450, equal to the gain in consumer surplus since this measures the welfare improvement
  4. $750, representing the total change in surplus that occurred due to the regulatory intervention
Explanation: The correct answer is A. Deadweight loss represents the welfare that was completely lost due to market inefficiency - transactions that would have been mutually beneficial but didn't occur. When the monopoly is regulated to price at MC, total welfare increases by the net gain: +$450 (consumer surplus) - 300(producersurplus)=+300 (producer surplus) = +150. This $150 represents the deadweight loss that existed under monopoly pricing. B is wrong because producer surplus loss includes both deadweight loss and transfer to consumers. C is wrong because consumer surplus gain includes both deadweight loss recovery and transfer from producers. D is wrong because it double-counts transfers between consumer and producer.

Question 6

Two identical markets each face a proposed $2 per-unit tax. In Market X, economists estimate the tax would reduce quantity from 500 to 400 units. In Market Y, economists estimate the same tax would reduce quantity from 300 to 200 units. Assuming linear supply and demand curves, which market would experience greater deadweight loss from the tax?

  1. Market X, because the larger initial quantity means more transactions are affected by the tax distortion
  2. Market Y, because the same absolute quantity reduction from a smaller base indicates higher relative elasticity
  3. Both markets would experience identical deadweight loss since they face the same tax rate and quantity reduction (correct answer)
  4. Market X, because deadweight loss is proportional to both the tax amount and the quantity reduction
Explanation: The correct answer is C. Deadweight loss from a tax equals (1/2) × tax × quantity reduction. For Market X: DWL = (1/2) × $2 × 100 = $100. For Market Y: DWL = (1/2) × $2 × 100 = $100. Both markets have identical deadweight loss despite different initial quantities. A is wrong because deadweight loss depends on quantity reduction, not initial quantity. B is wrong because while Market Y may have higher relative elasticity, the deadweight loss formula depends on absolute quantity changes. D is wrong because it ignores that both markets have the same tax and same quantity reduction.

Question 7

A government imposes a price ceiling of $8 in a market where the equilibrium price is $12 and equilibrium quantity is 100 units. At the ceiling price, quantity demanded is 140 units and quantity supplied is 60 units. If the government then removes the price ceiling and simultaneously imposes a $4 per-unit tax on producers, what happens to deadweight loss?

  1. Deadweight loss decreases because the tax creates less distortion than the price ceiling
  2. Deadweight loss increases because both policies create market inefficiencies that are additive
  3. Deadweight loss remains constant because both policies reduce quantity traded by the same amount
  4. Deadweight loss could increase or decrease depending on the relative elasticities of supply and demand (correct answer)
Explanation: The correct answer is D. Under the price ceiling, deadweight loss depends on the quantity actually traded (60 units) versus equilibrium (100 units). With the tax, the new equilibrium quantity and deadweight loss depend on how the $4 tax shifts supply relative to demand elasticities. Without knowing the specific elasticities, we cannot determine whether the tax creates more or less deadweight loss than the ceiling. A is wrong because taxes don't necessarily create less distortion than price controls. B is wrong because the policies aren't simultaneous - the ceiling is removed when the tax is imposed. C is wrong because different policies affecting the same quantity change don't necessarily create equal deadweight losses.

Question 8

A market has two potential sources of deadweight loss: a $3 per-unit tax and a negative externality of $2 per unit. If the government removes the tax but takes no action on the externality, what happens to total deadweight loss?

  1. Total deadweight loss decreases because removing any source of inefficiency improves welfare
  2. Total deadweight loss increases because the tax was partially correcting for the externality (correct answer)
  3. Total deadweight loss remains unchanged because one inefficiency is replaced by another
  4. The change in deadweight loss depends on the relative elasticities of supply and demand
Explanation: The correct answer is B. The $3 tax and $2 externality work in opposite directions. The tax reduces quantity below the private equilibrium, while the externality means the social optimum is below the private equilibrium. The tax partially corrects for the externality (though it over-corrects since $3 > $2). Removing the tax eliminates this partial correction, likely increasing total deadweight loss. A is wrong because removing one inefficiency can worsen welfare when multiple distortions exist. C is wrong because the magnitudes differ. D is wrong because the direction of change is determinable given the relative magnitudes.

Question 9

In a competitive market, consumer surplus is $800 and producer surplus is $600 at equilibrium. A monopolist takes over and reduces output, causing consumer surplus to fall to $300 and producer surplus to rise to $900. What is the deadweight loss from monopolization?

  1. $200, calculated as the reduction in total surplus from $1400 to $1200 (correct answer)
  2. $300, equal to the transfer from consumers to the monopolist producer
  3. $500, representing the total loss in consumer welfare due to monopoly pricing
  4. $1400, representing the total welfare that existed before monopolization occurred
Explanation: The correct answer is A. Deadweight loss equals the reduction in total social welfare. Under competition: total surplus = $800 + $600 = $1400. Under monopoly: total surplus = $300 + $900 = $1200. Deadweight loss = $1400 - $1200 = $200. B is wrong because it confuses transfer (from consumers to producer) with deadweight loss. The 300transfer(300 transfer (500 consumer loss minus $200 deadweight loss) doesn't represent welfare loss. C is wrong because consumer surplus loss includes both deadweight loss and transfer to producer. D is wrong because it represents the total welfare, not the loss.

Question 10

The market for a product has a demand curve of P=110−2QP = 110 - 2Q and a supply curve of P=20+QP = 20 + Q. The government imposes a production quota, limiting output to 25 units. What is the deadweight loss from this quota?

  1. $12.50
  2. $37.50 (correct answer)
  3. $75.00
  4. $375.00
Explanation: First, find the competitive equilibrium: 110−2Q=20+Q⇒90=3Q⇒Qe=30110 - 2Q = 20 + Q \Rightarrow 90 = 3Q \Rightarrow Q_e = 30. The quota of 25 units is binding. At Qq=25Q_q = 25, the price consumers are willing to pay is Pd=110−2(25)=60P_d = 110 - 2(25) = 60. The price producers are willing to accept is Ps=20+25=45P_s = 20 + 25 = 45. The deadweight loss is the area of the triangle between the equilibrium and quota quantities: DWL = (0.5 \times (Q_e - Q_q) \times (P_d(Q_q) - P_s(Q_q)) = 0.5 \times (30 - 25) \times (60 - 45) = 0.5 \times 5 \times 15 = $37.50).

Question 11

A competitive market is characterized by the demand function P=100−QP = 100 - Q and the supply function P=10+0.5QP = 10 + 0.5Q. If the government imposes a per-unit tax of $15 on sellers, what is the resulting deadweight loss?

  1. $750
  2. $375
  3. $75 (correct answer)
  4. $150
Explanation: First, find the pre-tax equilibrium: 100−Q=10+0.5Q⇒90=1.5Q⇒Qe=60100 - Q = 10 + 0.5Q \Rightarrow 90 = 1.5Q \Rightarrow Q_e = 60. The tax shifts the supply curve up by 15 to \(P = 25 + 0.5Q\). The new equilibrium quantity is found by \(100 - Q = 25 + 0.5Q \Rightarrow 75 = 1.5Q \Rightarrow Q_t = 50\). The deadweight loss is the area of a triangle with a height equal to the tax (15) and a base equal to the change in quantity (Qe−Qt=60−50=10Q_e - Q_t = 60 - 50 = 10). DWL = (0.5 \times \text{tax} \times (Q_e - Q_t) = 0.5 \times 15 \times 10 = $75).

Question 12

The market for a good is described by the supply equation QS=2P−20Q_S = 2P - 20 and the demand equation QD=100−PQ_D = 100 - P. If the government imposes a binding price ceiling at (P = $35), what is the deadweight loss?

  1. $25
  2. $75 (correct answer)
  3. $125
  4. $200
Explanation: First, find the equilibrium: 2P−20=100−P⇒3P=120⇒Pe=402P - 20 = 100 - P \Rightarrow 3P = 120 \Rightarrow P_e = 40 and Qe=60Q_e = 60. The ceiling at 35 is binding since it's below equilibrium. At \(P=35\), quantity supplied is \(Q_S = 2(35) - 20 = 50\), and quantity demanded is \(Q_D = 100 - 35 = 65\). The quantity traded is limited by supply: \(Q_c = 50\). The deadweight loss is the triangular area between supply and demand curves from \(Q_c = 50\) to \(Q_e = 60\). The height is the difference between what consumers value the 50th unit at (from demand: \(P = 100 - 50 = 50\)) and the ceiling price (35). DWL = (0.5 \times (60 - 50) \times (50 - 35) = 0.5 \times 10 \times 15 = $75).

Question 13

A small country imports a good for which the world supply is perfectly elastic. The country's domestic demand curve is downward sloping. If the government imposes a per-unit tax on domestic consumption of this good, which statement about the resulting deadweight loss (DWL) is true?

  1. There is no DWL because supply is perfectly elastic, so producers absorb the entire tax.
  2. There is no DWL because the entire tax is passed on to consumers, who simply pay a higher price.
  3. A DWL is created, and it is entirely composed of lost producer surplus from foreign firms.
  4. A DWL is created because consumers reduce their quantity demanded in response to a higher price. (correct answer)
Explanation: When analyzing tax effects in international trade, focus on how perfectly elastic supply changes the typical tax incidence story. With perfectly elastic world supply, foreign producers will supply any quantity at the same world price - they won't accept a lower price after taxes. Here's what happens: When the government imposes a per-unit consumption tax, the price consumers pay rises by the full amount of the tax (from the world price to world price plus tax). Since foreign suppliers maintain their original price, consumers bear the entire tax burden. However, this higher consumer price causes movement along the downward-sloping demand curve - consumers reduce their quantity purchased. This reduction in quantity traded below the socially optimal level creates deadweight loss. Answer A incorrectly suggests producers absorb the tax, but perfectly elastic supply means producers maintain their original price and simply supply whatever quantity is demanded. Answer B contains a dangerous misconception: while consumers do pay the higher price, deadweight loss isn't about who pays the tax - it's about the efficiency loss from reduced trade. The fact that the tax is "passed on" doesn't eliminate DWL. Answer C wrongly attributes the deadweight loss to lost producer surplus from foreign firms, but with perfectly elastic supply, foreign producers have no surplus to lose at any given price. Remember this pattern: deadweight loss occurs whenever taxes cause quantity traded to fall below the efficient level, regardless of who bears the tax burden. Don't confuse tax incidence (who pays) with efficiency effects (whether DWL exists).

Question 14

Deadweight loss serves as a unifying metric for welfare analysis because it measures the net loss in total surplus. Which of the following government actions would not be expected to create a deadweight loss, assuming it does not alter incentives to work or invest?

  1. A price ceiling on rental apartments set below the market-clearing rent.
  2. A per-gallon tax on gasoline to fund highway repairs.
  3. A subsidy for domestic producers of solar panels to encourage green energy.
  4. A direct cash transfer to low-income families funded by a lump-sum tax on all citizens. (correct answer)
Explanation: When analyzing deadweight loss, you need to understand that it occurs when government interventions prevent mutually beneficial trades from happening, reducing total economic surplus below its efficient level. Option D is correct because a direct cash transfer funded by a lump-sum tax creates no deadweight loss. The lump-sum tax doesn't depend on any economic behavior—everyone pays the same amount regardless of their choices about working, consuming, or investing. Since the tax doesn't alter relative prices or create substitution effects, it doesn't discourage beneficial economic activity. The transfer simply redistributes money from one group to another without affecting market efficiency. Option A creates deadweight loss because a price ceiling below market-clearing rent prevents landlords and tenants from making mutually beneficial rental agreements above the ceiling price. Some apartments that would be profitably rented at market rates won't be supplied. Option B generates deadweight loss because the gasoline tax raises the price consumers pay above the price producers receive, discouraging some transactions that would benefit both buyers and sellers. The tax wedge prevents these efficient trades. Option C creates deadweight loss through a subsidy that encourages overproduction of solar panels beyond the efficient level. The subsidy allows production of panels whose social cost exceeds their social benefit. Remember this key distinction: taxes or subsidies that change relative prices typically create deadweight losses, while lump-sum transfers that don't affect marginal decisions preserve economic efficiency. Look for interventions that maintain or distort price signals when evaluating welfare effects.

Question 15

The production of a chemical generates a negative externality. The marginal private cost is MPC=10+QMPC = 10 + Q, and the marginal social cost is MSC=20+QMSC = 20 + Q. Market demand is given by P=80−QP = 80 - Q. In an unregulated market, what is the deadweight loss?

  1. $25 (correct answer)
  2. $50
  3. $100
  4. $350
Explanation: The unregulated market produces where marginal private cost equals demand (marginal benefit): 10+Q=80−Q⇒2Q=70⇒Qmkt=3510 + Q = 80 - Q \Rightarrow 2Q = 70 \Rightarrow Q_{mkt} = 35. The socially optimal quantity is where marginal social cost equals demand: 20+Q=80−Q⇒2Q=60⇒Qopt=3020 + Q = 80 - Q \Rightarrow 2Q = 60 \Rightarrow Q_{opt} = 30. The market overproduces. The deadweight loss is the area of the triangle between these two quantities, bounded by the MSC and demand curves. DWL = 0.5×(Qmkt−Qopt)×(MSC(Qmkt)−P(Qmkt))0.5 \times (Q_{mkt} - Q_{opt}) \times (MSC(Q_{mkt}) - P(Q_{mkt})). At Qmkt=35Q_{mkt}=35, MSC=20+35=55MSC = 20+35=55 and P=80−35=45P=80-35=45. DWL = (0.5 \times (35 - 30) \times (55 - 45) = 0.5 \times 5 \times 10 = $25).

Question 16

A government wants to reduce consumption of a good from its competitive equilibrium level of 1,000 units to 800 units. It can achieve this either with a per-unit tax or a production quota of 800 units. Assuming standard, non-linear supply and demand curves, which statement correctly compares the deadweight loss (DWL) of the two policies?

  1. The tax will create a larger DWL because it generates government revenue, which is a leakage from the market.
  2. The quota will create a larger DWL because it is a more rigid restriction on market activity.
  3. The DWL will be identical under both policies, as they both result in the same reduction in quantity traded. (correct answer)
  4. The relative size of the DWL cannot be determined without knowing the elasticities of supply and demand.
Explanation: The deadweight loss is determined by the wedge between the demand price and the supply price over the range of the quantity reduction. Since both the tax and the quota are designed to reduce the quantity from 1,000 to 800, they must create the same wedge between the price buyers are willing to pay (PDP_D) and the price sellers are willing to accept (PSP_S) at the quantity of 800. The size of the deadweight loss is the lost surplus between 1,000 and 800 units, which is a function of the shapes of the curves in that range and is identical regardless of which policy created the quantity restriction.

Question 17

The supply of land in a particular city is perfectly inelastic. Demand for this land is downward-sloping. If the city government imposes a 5% tax on all land sale transactions, which of the following is the most likely result?

  1. A large deadweight loss, as the tax will be fully passed on to buyers in the form of higher prices.
  2. A large deadweight loss, as the tax will be fully borne by sellers in the form of lower net prices.
  3. A small deadweight loss, with the tax burden being shared between buyers and sellers.
  4. Zero deadweight loss, because the quantity of land supplied and traded will not change. (correct answer)
Explanation: When analyzing tax incidence and deadweight loss, the key insight is that elasticity determines both who bears the tax burden and whether quantity traded changes. Perfect inelasticity means quantity supplied doesn't respond to price changes at all. With perfectly inelastic land supply, the quantity of land available remains constant regardless of price. When the government imposes a 5% tax, sellers will absorb the entire tax burden because they cannot reduce the quantity they supply. The market price paid by buyers stays the same, but sellers receive 5% less after paying the tax. Crucially, since the same quantity of land continues to be traded, there's no reduction in mutually beneficial transactions. Answer A is wrong because the tax isn't passed to buyers - with perfectly inelastic supply, sellers bear the full burden, and buyer prices don't increase. Answer B correctly identifies that sellers bear the tax burden but incorrectly assumes this creates large deadweight loss. The magnitude of deadweight loss depends on quantity changes, not who pays the tax. Answer C is incorrect because the tax burden isn't shared - perfect inelasticity on the supply side means sellers absorb it entirely. Answer D is correct: zero deadweight loss occurs because quantity traded remains unchanged. Deadweight loss measures the value of transactions that don't happen due to the tax, but here, all land transactions that would occur without the tax still occur with it. Remember: deadweight loss comes from reduced quantity traded, not from tax burden distribution. When supply or demand is perfectly inelastic, taxes don't change quantities, eliminating deadweight loss entirely.

Question 18

Consumers in a market do not fully perceive the benefits of a product. Their perceived demand (marginal private benefit) is MPB=50−2QMPB = 50 - 2Q, while the true demand (marginal social benefit) is MSB=70−2QMSB = 70 - 2Q. The marginal cost of supply is MC=10+QMC = 10 + Q. What is the deadweight loss due to this information failure?

  1. $20
  2. $66.67 (correct answer)
  3. $133.33
  4. $400.00
Explanation: The market will operate where perceived benefit equals cost: MPB=MC⇒50−2Q=10+Q⇒40=3Q⇒Qmkt=40/3MPB = MC \Rightarrow 50 - 2Q = 10 + Q \Rightarrow 40 = 3Q \Rightarrow Q_{mkt} = 40/3. The socially optimal quantity is where true benefit equals cost: MSB=MC⇒70−2Q=10+Q⇒60=3Q⇒Qopt=20MSB = MC \Rightarrow 70 - 2Q = 10 + Q \Rightarrow 60 = 3Q \Rightarrow Q_{opt} = 20. The market under-produces. The DWL is the lost surplus on the units from 40/340/3 to 20. At Qmkt=40/3Q_{mkt}=40/3, MSB=70−2(40/3)=130/3MSB = 70 - 2(40/3) = 130/3 and MC=10+40/3=70/3MC = 10 + 40/3 = 70/3. The height of the DWL triangle at QmktQ_{mkt} is MSB−MC=130/3−70/3=60/3=20MSB - MC = 130/3 - 70/3 = 60/3 = 20. The base is Qopt−Qmkt=20−40/3=20/3Q_{opt} - Q_{mkt} = 20 - 40/3 = 20/3. DWL = (0.5 \times \text{base} \times \text{height} = 0.5 \times (20/3) \times 20 = 200/3 \approx $66.67).

Question 19

In a market with demand P=70−QP = 70 - Q and supply P=10+QP = 10 + Q, the government provides a $10 per-unit subsidy to producers. What is the deadweight loss created by this subsidy?

  1. $25 (correct answer)
  2. $50
  3. $300
  4. $350
Explanation: First, find the efficient equilibrium: 70−Q=10+Q⇒60=2Q⇒Qe=3070 - Q = 10 + Q \Rightarrow 60 = 2Q \Rightarrow Q_e = 30. A $10 subsidy to producers effectively shifts the supply curve down by $10, to P=(10−10)+Q=QP = (10 - 10) + Q = Q. The new quantity is found where demand meets the new supply: 70−Q=Q⇒70=2Q⇒Qs=3570 - Q = Q \Rightarrow 70 = 2Q \Rightarrow Q_s = 35. The subsidy causes overproduction by 35−30=535 - 30 = 5 units. The deadweight loss is the area of the triangle representing the value of this inefficiency. DWL = (0.5 \times \text{subsidy} \times (Q_s - Q_e) = 0.5 \times 10 \times (35 - 30) = 0.5 \times 10 \times 5 = $25).

Question 20

In the context of a market distorted by a per-unit tax, the area of the deadweight loss triangle represents:

  1. the total reduction in consumer and producer surplus resulting from the tax.
  2. the portion of producer surplus that is transferred to the government as tax revenue.
  3. the net loss in total surplus from transactions that no longer occur due to the tax. (correct answer)
  4. the total tax revenue collected by the government, also known as the excess burden of the tax.
Explanation: Deadweight loss is the net loss of total surplus (consumer + producer surplus) that is not captured by anyone else (like the government). It arises because the tax discourages mutually beneficial trades. The area represents the sum of the differences between buyers' valuations and sellers' costs for each unit of output that is no longer traded. The total reduction in CS and PS is equal to the DWL plus the tax revenue. Tax revenue is a transfer, not a net loss. The excess burden is the DWL, not the tax revenue.