FIGURE 18-3
-Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P4, the excess burden of the tax is

Question

Quizplus · Accepted Answer

The excess burden of a tax is the loss of consumer and producer surplus that results from the tax. In this case, since supply is perfectly elastic, producers are able to pass on the entire burden of the tax to consumers in the form of a price increase.

The area of the triangle P1CP4 represents the loss of consumer surplus due to the tax, and the area of the rectangle CBP4F represents the loss of producer surplus. Therefore, the excess burden of the tax is the sum of these two areas, which is equal to the area of the triangle P1CP4 plus the area of the rectangle CBP4F.

The area of the triangle P3AP4 represents the revenue generated by the tax, but it does not represent a loss of surplus, so it is not part of the excess burden calculation. The area P1Cq10 represents the initial producer surplus, but again, it does not represent a loss of surplus due to the tax, so it is not part of the excess burden calculation. The area BFC is also not relevant to the excess burden calculation.

FIGURE 18-3 -Refer to Figure 18-3. Suppose That Supply Is Perfectly Elastic