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 the tax is the reduction in consumer surplus and producer surplus caused by the tax. In this case, because supply is perfectly elastic, the entire burden of the tax falls on the producers, who will sell the same amount of the good regardless of the tax. The reduction in producer surplus is therefore the area P1CP4. There is no reduction in consumer surplus because the quantity demanded does not change. Therefore, the excess burden of the tax is the same as the reduction in producer surplus, which is the area P1CP4.

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