Question

The graph below shows demand and supply in the market for airline tickets. The government decides to introduce an excise (or commodity) tax that pushes up the price for consumers from Pe to Pc and decrease quantity supplied from Qe to Q1 .Use the labeling below to identify the areas that match the terms indicated. Note that you may place each letter multiple times, and that some answers will require moving more than one letter into the bin to identify the appropriate area on the graph

Answer 1

Government Tax Revenue = B + C

Producer Surplus Before Tax = C + D+ G

Producer Surplus After Tax = D

Consumer Surplus Before Tax = A+ B + F

Consumer Surplus After Tax = A

Deadweight Loss After Tax = G + F

To see why this deadweight loss occurs, look at the supply and demand curves in the graph below. When a market transaction is taxed, the buyer pays a higher price and the seller receives a lower price. This lowers demand, which shifts the buyer's equilibrium from the market price to a higher price; likewise, because the seller receives less for his product, less of it is supplied, which moves the seller's equilibrium down the supply curve, to a lower price. The amount that the government receives is equal to the tax, which is equal to the buyer's price minus the seller's price, times the quantity of the transaction, whether for goods or services.

Tax Revenue = Tax × Quantity

Deadweight Loss of Taxation thismatter.com Deadweight Loss Pb Tax Revenue Ps Quantity