Question

The following graph shows the equilibrium price and quantity in the market for chewing gum in the country of Argonia. Suppcse the govemment of Argonia passes a bill to impose a tax of 6 Argonian dollars on the production of chewing gum. Market for Chewing Gum The new equilibrium price is 7.5 Argonian dollars and the new equilibrium quantity is 1 million sticks of gum. (Round your responses to one decimal place.) Tax revenue earned by the government is million Argonian dollars. (Enter your response es an integer.) S1 Quantity (in millions of sticks) S2 Enter your answer in the answer box and then click Check Answer.

part c: what is the deadweight loss of this tax

part d: which is greater: the loss in consumer surplus or the loss in producer surplus

Answer 1

Price 7.5 Loss in consumer surplus S1 Loss in producer 1.5 surplus 1 4 Quantity

Price = 7.5 Argonian dollars, Equilibrium quantity = 1 mn

Tax revenue earned = tax per unit x equlibrium quantity = 6 x 1 = 6 mn Argonian dollars

Deadweight loss = tax x (equilibrium quantity before tax - equilibrium quantity after tax) x 0.5

DWL = 6 x 0.5 x (4 - 1) = 9 mn Argonian dollars

It can be seen from the diagram above, the loss in consumer surplus > the loss in producer surplus. (Areas can also be calculated to show the same)