Without Tax With Tax Change
Consumer Surplus
Producer Surplus Tax Revenue Total Surplus
A+B+C
D+E+F none
A
F B+D A+B+D+F
- (B + C)
- (D + E) + (B + D) - (C + E )
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Price
When supply is relatively elastic, the deadweight loss of a tax is large.
Size of tax
Supply
Demand
0
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
The Costs of Taxation
It does not matter whether a tax on a good is levied on buyers or sellers of the good…the price paid by buyers rises, and the price received by sellers falls.
How a Tax Affects Welfare...
Price Price buyers pay = PB Price without = P1 tax