Explain, with reference to your diagram.The tax will decreasethe total surplus. Total surplus is the sum of Consumer and producersurplus, and this sum is maximized when p = MC (as in perfect competition without tax).With the tax, there is a gap between price consumers pay and MC, with consumer pricegreater than MC - so some potential surplus is not realized (the DWL). Notice that the taxcollected by the government is not part of the "lost" surplus, since it is produced - justredistributed to the gov't.h) (3) If this market was in long run equilibrium before the tax was introduced, andthe production technology has decreasing returns to scale, by how much will thelong run equilibrium price change, relative to the size of the tax? Explain briefly.If production technology has DRS, then the long run average cost curve is positively sloped.Potential exists for long-run equilibrium price paid by consumers to rise by less than the $10 tax,ifin the new eq'm each firm is producing less than it did in the initial eq'm (10 units). Will thishappen? Maybe - depends on exit process. At worst, in the long run the price paid by consumerswill rise by 10 (the amount of the tax). In either case, since in the long-run firms make zeroeconomic profits while consumers capture some consumer surplus, consumers will bear the fullburden of the tax in the long-run.
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