Editing Deadweight loss (section)

=== Determinants ===
Price elasticities of supply and demand determine whether the deadweight loss from a tax is large or small. This measures to what extent quantity supplied and quantity demanded respond to changes in price. For instance, when the supply curve is relatively inelastic, quantity supplied responds only minimally to changes in the price. However, when the supply curve is more elastic, quantity supplied responds significantly to changes in price. In other words, when the supply curve is more elastic, the area between the supply and demand curves is larger. Similarly, when the demand curve is relatively inelastic, deadweight loss from the tax is smaller, comparing to more elastic demand curve.

A tax results in deadweight loss as it causes buyers and sellers to change their behaviour. Buyers tend to consume less when the tax raises the price. When the tax lowers the price received by sellers, they in turn produce less. As a result, the overall size of the market decreases below the optimum equilibrium. The elasticities of supply and demand determine to what extent the tax distorts the market outcome. As the elasticities of supply and demand increase, so does the deadweight loss resulting from a tax.<ref name=":0" />