Question

identify and explain how to calculate

(i)consumer surplus

(ii) producer surplus

(iii) total surplus ( with and without tax)

(iv) deadweight loss

(v) tax revenue

(vi) graph the above

(vii) share of tax burden paid by the buyer and seller - calculating change in CS, PS and TS

What is Laffer?

what is tariff?

Answer 1

Consider the graph above where the initial supply curve is S1 and demand curve is D and initial equilibrium point is E where Q=40 and P=40

Now,suppose a tax of $30 is imposed It will shift the supply curve at each price level by $30 so that new supply curve is S2 where Q=20.

Price paid by buyers = 55

Price received by sellers = 25

i) initial CS = area of the triangle above the equilibrium price CABF

=0.5*40*(70-40) = 600

CS after tax = area C = 0.5*20*(70-55) = 150

ii)Initial PS = area of the triangle below the equilibrium price DGP

=0.5*40*(40-10) = 600

PS after tax = area P = 0.5*20*(25-10) = 150

iii) TS = CS+PS = 600+600=1200

TS after tax = 150+150=300

iv) DWL = area F+G = 1/2*(40-20)*(55-25)] = 300

v) Tax revenue = area A+B+D = 20*(55-25) = 600

vii) Share of tax burden paid by buyers = 55-40/30*100 = 50%

Share of tax burden paid by sellers = 40-25/30*100 = 50%

Change in CS = 600-15=450

Change in PS = 600-150=450

Change in TS = 1200-300 = 900