CHAPTER 8 APPLICATION: THE COSTS OF TAXATION 165 Welfare with a Tax Now consider welfare after the tax is enacted. The price paid by buyers rises from P 1 to P B , so consumer surplus now equals only area A (the area below the demand curve and above the buyer’s price). The price received by sellers falls from P 1 to P S , so producer surplus now equals only area F (the area above the supply curve and below the seller’s price). The quantity sold falls from Q 1 to Q 2 , and the government collects tax revenue equal to the area B ± D. To compute total surplus with the tax, we add consumer surplus, producer surplus, and tax revenue. Thus, we find that total surplus is area A ± B ± D ± F. The second column of Table 8-1 provides a summary. Changes in Welfare We can now see the effects of the tax by comparing welfare before and after the tax is enacted. The third column in Table 8-1 shows the changes. The tax causes consumer surplus to fall by the area B ± C and producer surplus to fall by the area D
This is the end of the preview.
access the rest of the document.