Consider a perfectly competitive market with market supply and market demand Suppose the government imposes an excise tax of $4 per unit on this market.What is total surplus (consumer surplus plus producer surplus) after the government imposes the tax?

Question

Consider a perfectly competitive market with market supply  and market demand  Suppose the government imposes an excise tax of $4 per unit on this market.What is total surplus (consumer surplus plus producer surplus) after the government imposes the tax?

Quizplus · Accepted Answer

Before tax, equilibrium price is at $14 and equilibrium quantity is at 8 units. 
With the $4 excise tax, the new supply curve shifts upward by $4 to P=$18. Consumers will now buy at P=$18 instead of $14. At this new price, only 6 units are produced since Qs=11-Qd=5 at P=$18.
The new consumer surplus is (1/2)(14-18)(8-6)= $4.
The new producer surplus is (1/2)(18-4)(6)= $84. 
Thus, the total surplus after the government imposes the tax is $84+$4= $88. However, the government receives $4 per unit from producers, so this revenue must be subtracted from the total surplus. ($88 - $4x6 = $64) Therefore, the correct answer is C) 144.

Consider a Perfectly Competitive Market with Market Supply and Market