The deadweight loss caused by taxes
taxation 
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A $1,000 tax on used cars causes the number of units exchanged to fall from 750,000 to 500,000. It reduces the quantity of units exchanged by 250,000 units. Remember, trade results in mutual gains for both buyers and sellers. The loss of the mutual benefits that would have been derived from -these additional 250,000 units also imposes a cost on buyers and sellers. But this cost the loss of the gains from trade eliminated by the tax- does not generate any revenue for the government. Economists call this the deadweight loss of taxation. The size of the triangle ABC measures the deadweight loss. The deadweight loss is a burden imposed on buyers and sellers over
and above the cost of the revenue transferred to the government. Sometimes it is referred to as the excess burden of taxation. It is composed of losses to both buyers (the lost consumer surplus consisting of the upper part of the triangle ABC) and sellers (the lost
producer surplus consisting of the lower part of the triangle ABC). The deadweight loss to sellers includes an indirect cost imposed on the people who
supply resources to that industry (such as its suppliers and employees). The 1990 luxury- boat tax provides a good example. Supporters of the luxury-boat tax assumed the tax burden would fall primarily on wealthy yacht buyers. The actual effects were quite different, though. Because of the tax, luxury-boat sales fell sharply and thousands of workers lost their jobs in the yacht-manufacturing industry. The deadweight loss triangle might seem like an abstract concept, but it wasn’t so abstract to the employees in the yacht industry who lost their jobs! Their losses are part of what is reflected in the triangular area. Moreover, because luxury-boat sales declined so sharply, the tax generated only a meager amount of revenue. The large deadweight loss (or excess bur- den) combined with meager revenue for the government eventually led to the repeal of the tax.