Wize AP Microeconomics Textbook > Efficiency
CS and PS with Taxes
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Consumer Surplus and Producer Surplus with Taxes
Before Tax After Tax Change
Consumer Surplus
A + B + C
A
- B - C
Producer Surplus
D + E + F
F
- D - E
Government Revenue
None
B + D
+ B + D
Total Surplus
A + B + C + D + E + F
A + B + D + F
- C - E
- Deadweight Loss (DWL) - the change in total surplus as we go from equilibrium to the new point (after tax). It is caused by the loss in consumer and producer surplus due to the lower quantity being produced. The DWL is also called change in total surplus or change in welfare
- The consumer and producer surplus before tax just means at equilibrium.
- Consumer surplus after tax - we only take the area above the consumer's price (which is only triangle A) because only those consumers are still willing to buy the product (at a price of $12)
- Producer surplus after tax - we only take the area below the producer's price (which is triangle F) because only those producers are still willing to sell the product (receiving only $8).
- Government Revenue - this is the tax multiplied by the new quantity ($4 * 15) which is the rectangle B and D.
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Example: Tax and Elasticity
Would the Deadweight Loss (DWL) be bigger or smaller in the following situations:
1. Inelastic Supply
If supply is inelastic the deadweight loss will be
small
because the equilibrium quantity will fall by only a little bit. 2. Inelastic Demand
If the demand is inelastic the deadweight loss will be
small
because the equilibrium quantity will fall by only a little bit.3. Elastic Supply
If the supply is elastic the deadweight loss will be
big
because the equilibrium quantity will fall by a lot.4. Elastic Demand
If demand is elastic the deadweight loss will be
big
because the equilibrium quantity will fall by a lot.Practice: CS and PS with Taxes
If the supply is relatively inelastic, which of the following is true: