Question

Please help solve

ry Cook In the market below, the original equilibrium price was p and equilibrium qu in the market and shifted the Supply line upward to s 1. In the diagram identify: The price the buyers pay after the tax The price the sellers receive after the tax tax revenue the government receives The new consumer surplus after the tax The new producer surplus after the tax The deadweight loss due to the tax The 2. Why does a tax cause a deadweight loss?

Answer 1

The diagram below shows the effect of a tax on seller. Price paid by buyers goes up and price received by sellers fall down. Consumer Surplus and Producer Surplus both fall and there is a deadweight loss

The reason for the deadweight loss is the reduction in the CS and PS which is caused by the tax. A tax is inefficient because it does not allow the market to find its efficient allocation. Hence allocative efficiency is not achieved.

Producer surplus Consumer surplus rice paid by buyer S+tax Deadweight loss 12 Government revenue 8.0 6.0 4.0 TR DWL PS 2.0 Price received b eller 4 0.0 2 10 12