Producer surplus is the net benefit a producer gets

Info icon This preview shows pages 6–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Producer surplus is the net benefit a producer gets from selling a good. Equilibrium maximizes the combination of consumer and producer surplus. Taxes create a loss of consumer and producer surplus known as deadweight loss, which is graphically represented by the welfare loss triangle. Summary The cost of taxation to consumers and producers includes the actual tax paid, the deadweight loss, and the costs of administering the tax. Government follows both the benefit principle and the ability-to-pay principle when deciding on whom to levy taxes. Relative elasticities determine who bears the burden of the tax. The more inelastic one’s demand or supply, the larger the burden of the tax. Summary Price ceilings and floors, like taxes, result in loss of consumer and producer surplus. Price ceilings transfer producer surplus to consumers; they are a tax on producers and a subsidy to consumers. Price floors transfer consumer surplus to producers; they are a tax on consumers and a subsidy to producers. The more elastic supply and/or demand is, the greater the surplus with an effective price floor and the greater the shortage is with an effective price ceiling.
Image of page 6

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7 $4 $10 $9 $8 $7 $6 $5 50 100 300 250 200 150 Review Question 7-1 Given the following demand and supply of pizza, find consumer and producer surplus. Consumer surplus: ½ x ($10-6) x 100 = $200 Producer surplus: ½ x ($6-4) x 100 = $100 S D Review Question 7-2 Given the following demand and supply of pizza, show the effects of a price floor at $8. $4 $10 $9 $8 $7 $6 $5 50 100 300 250 200 150 Price floor Consumer surplus Deadweight loss Producer surplus S D
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern