Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price.

-Refer to Figure 8-7.One effect of the tax is to
A)reduce consumer surplus by $36.
B)reduce producer surplus by $24.
C)create a deadweight loss of $20.
D)All of the above are correct.

Question

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price.
 
-Refer to Figure 8-7.One effect of the tax is to
A)reduce consumer surplus by $36. 
B)reduce producer surplus by $24. 
C)create a deadweight loss of $20. 
D)All of the above are correct.

Quizplus · Accepted Answer

The tax causes a shift in the supply curve upward by the amount of the tax (from S1 to S2). This causes the price paid by consumers to increase from P1 to P2 while the price received by producers decreases from P1 to P3. As a result, consumer surplus decreases by the area A+B+C and producer surplus decreases by the area D+E+F, which adds up to a total reduction in surplus of $36 ($20 + $16).

Additionally, the tax creates a deadweight loss of $20, represented by the shaded triangle in the graph. This is a loss in potential surplus that arises because the tax reduces the quantity of the good traded below the efficient level.

Therefore, all of the above statements are correct.

Figure 8-7 the Graph Below Represents a $10 Per Unit