An excise tax imposed on junk food reduces consumer surplus by $50,producer surplus by $80,and results in tax revenue of $40 for the government.What is the welfare effect of this tax?
A)A net loss of $10
B)A net gain of $40
C)A net loss of $90
D)A net loss of $130

Question

Quizplus · Accepted Answer

The welfare effect of the tax is the sum of the reduction in consumer surplus and producer surplus minus the tax revenue. In this case, the reduction in consumer surplus is $50 and the reduction in producer surplus is $80, resulting in a total reduction of $130. However, the government collects tax revenue of $40, which partially offsets the reduction in welfare. Thus, the net loss of welfare is $130 - $40 = $90. Therefore, choice C is correct.

An Excise Tax Imposed on Junk Food Reduces Consumer Surplus