Caroline,John,and Jackie each like historical biographies.The current bestseller costs $25.Caroline values it at $30,John at $28,and Jackie at $26.Suppose that if the government taxes books at $2 each,the selling price will rise to $27.A consequence of the tax is that
A)consumer surplus shrinks by $9 and tax revenues increase by $6, so there is a deadweight loss of $3.
B)consumer surplus shrinks by $6 and tax revenues increase by $6, so there is no deadweight loss.
C)consumer surplus shrinks by $5 and tax revenues increase by $6, so there is no deadweight loss.
D)consumer surplus shrinks by $5 and tax revenues increase by $4, so there is a deadweight loss of $1.

Question

Quizplus · Accepted Answer

With the tax, the selling price of the book would be $27, which is the average of Caroline's valuation ($30), John's valuation ($28), and Jackie's valuation ($26). Before the tax, Caroline would have a consumer surplus of $5 ($30-$25), John would have a consumer surplus of $3 ($28-$25), and Jackie would have a consumer surplus of $1 ($26-$25), for a total consumer surplus of $9. After the tax, Caroline would still have a consumer surplus of $3 ($30-$27), John would have a consumer surplus of $1 ($28-$27), and Jackie would have no consumer surplus (since the price matches her valuation). This makes the total consumer surplus $4, a decrease of $5. However, the tax revenue would be $2 per book, leading to a total tax revenue of $6 (since three books are sold). Therefore, the net loss to society is $1 ($5 decrease in consumer surplus - $4 increase in tax revenue).

Caroline,John,and Jackie Each Like Historical Biographies