For instance suppose the marginal buyer would spend $20 for a product and the producer can produce for $18 and the market price is $19, resulting in $1surplus to each party. If a $3 tax was put on the product, the transaction wouldn't take place.
So you went from $2 social surplus to nothing and no tax benefit.
Any arbitrary price distortions will result in dead weight loss or the overall social surplus to go down compared to no distortion
The market price would be floored at $21 as it costs the producer $18 to produce and a $3 tax. The prior margin was $1 so realistically the producer would eat some of the increase and charge $21.50
For the person who values the good only at $20, no transaction would take place. If eventually the producer cost went down to something like $16, maybe the price would come down to $20 or below but then there's the marginal consumer that values it at $19.
Price distortions almost always result in a dead weight loss. Only in perfectly inelastic products does it not exist
> Price distortions almost always result in a dead weight loss.
Yes, some trades will not take place take after the distortion, but the the person valuing the good at 20 and still be unwilling to pay 23 after an extended time period in which they're unable to buy it is extremely rare.
For instance suppose the marginal buyer would spend $20 for a product and the producer can produce for $18 and the market price is $19, resulting in $1surplus to each party. If a $3 tax was put on the product, the transaction wouldn't take place.
So you went from $2 social surplus to nothing and no tax benefit.
Any arbitrary price distortions will result in dead weight loss or the overall social surplus to go down compared to no distortion