Identifying tax incidence in a graph | APⓇ Microeconomics | Khan Academy | Summary and Q&A

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October 5, 2017
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Identifying tax incidence in a graph | APⓇ Microeconomics | Khan Academy

TL;DR

This analysis explains the impact of a tax on consumer surplus, producer surplus, tax revenue, and deadweight loss in a market.

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Questions & Answers

Q: How was the consumer surplus affected after the tax?

After the tax, the consumer surplus was still present, but it was now the region above the new equilibrium price (including the tax) and below the demand curve. Consumers were still benefiting as they paid less than what they were willing to pay.

Q: How did the tax impact the producer surplus?

The producer surplus was affected because producers did not get to keep the tax revenue. The actual price the producers received, or the net of taxes, was below the equilibrium price. The producer surplus was the area above the net of taxes and below the price at which they were willing to produce.

Q: What constitutes the tax revenue?

The tax revenue is the difference between the consumer surplus after the tax and the producer surplus after the tax. It is essentially the portion of the total surplus that goes to the government. The government receives this revenue as a result of the tax imposed on every unit of the good.

Q: How is deadweight loss calculated in this scenario?

The deadweight loss is the difference between the original total surplus and the new total surplus after the tax. The original total surplus was represented by a triangle, while the new total surplus is a trapezoid. The area lost (T plus W) between these two represents the deadweight loss.

Summary & Key Takeaways

  • Before the tax, the market had an equilibrium price and quantity determined by the intersection of the supply and demand curves.

  • Consumer surplus was the area above the equilibrium price and below the demand curve, while producer surplus was the area above the supply curve and below the equilibrium price.

  • After the tax, the effective supply curve shifted, resulting in a new equilibrium price and quantity. The consumer surplus, producer surplus, tax revenue, and deadweight loss were all affected.

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