Question

Taxes and welfare

Consider the market for commercial fans. The following graph shows the demand and supply for commercial fans before the government imposes any taxes.

First, use the black point (plus symbol) to indicate the equilibrium price and quantity of commercial fans in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price.

Before TaxEquilibriumConsumer SurplusProducer Surplus05010015020025030035040045050050454035302520151050PRICE (Dollars per fan)QUANTITY (Fans)DemandSupplyArea: 0

Suppose the government imposes an excise tax on commercial fans. The black line on the following graph shows the tax wedge created by a tax of $20 per fan.

First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss.

After TaxTax RevenueConsumer SurplusProducer SurplusDeadweight Loss05010015020025030035040045050050454035302520151050PRICE (Dollars per fan)QUANTITY (Fans)DemandSupplyTax WedgeArea: 0

Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax.

Note: You can determine the areas of different portions of the graph by selecting the relevant area.

	Before Tax	After Tax
	(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus
Tax Revenue	0
Deadweight Loss	0

Answer 1

Answer.

Before tax,

After tax,

Excise tax is the tax levied on manufacturers. This will reduce the supply by the amount of tax and curve will shift to the left.

Before Tax After Tax

Consumer Surplus. A A' (reduced)

Producer Surplus . B. B' (reduced)

Tax Revenue. 0 . C'

Deadweight Loss. 0 . D'