Figure 8-10
-Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. Without the tax, the total surplus is

Question

Figure 8-10 
-Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. Without the tax, the total surplus is

Quizplus · Accepted Answer

The total surplus without the tax is the sum of the consumer surplus (area A+B) and the producer surplus (area C+D+E). The consumer surplus is given by [0.5 x (P0-P5) x Q5] + [0.5 x (P5-0) x Q5] = [x (P0-P5) x Q5]. The producer surplus is given by [0.5 x (P5-P0) x Q5] + [0.5 x (P5-P2) x (Q5-Q2)] = [x (P5-P0) x Q5] - [x (P5-P2) x Q2] = [x (P0-P5) x Q5] + [(P5-P2) x Q2] + [x (P2-0) x Q2]. Therefore, the total surplus without the tax is [x (P0-P5) x Q5] + [(P5-P2) x Q2] + [x (P2-0) x Q2].

Figure 8-10 -Refer to Figure 8-10. Suppose the Government Imposes a Tax