# Producer surplus is the net benefit a producer gets

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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.

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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
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