What happens to the deadweight loss when taxes increase?

When taxes increase, the deadweight loss resulting from the tax also typically increases. Deadweight loss refers to the economic inefficiency that occurs when the equilibrium outcome in a market is not achieved due to external interventions like taxes. This inefficiency is characterized by the reduction in consumer and producer surplus that occurs because the tax creates a wedge between the price consumers pay and the price producers receive.

As the tax becomes larger, the incentive for consumers to purchase the good decreases, and the incentive for producers to supply the good also diminishes. This causes a decrease in the quantity traded in the market compared to a no-tax scenario. The result is a greater discrepancy between the ideal market outcome and the actual outcome, which is what manifests as an increase in deadweight loss.

Higher taxes create a steeper reduction in quantity traded, meaning that the lost economic welfare (in the form of consumer and producer surplus) expands. Therefore, a larger tax not only reduces the market quantity but also amplifies the deadweight loss associated with the tax, leading to a more significant inefficiency in the market.