Question

2. Taxes and welfare

Consider the market for commercial fans. The following graph shows the demand and supply for commercial fans before the government imposes any taxes.

First, use the black point (plus symbol) to indicate the equilibrium price and quantity of commercial fans in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price.

Suppose the government imposes an excise tax on commercial fans. The black line on the following graph shows the tax wedge created by a tax of $20 per fan.

First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss.

Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax.

Note: You can determine the areas of different portions of the graph by selecting the relevant area.

Answer 1

The first figure may be constructed as follows: 50 45 40 35 Demand 25 15 Supply 10 0 80 160 240 320 400 480 560 640 720 800 QUANTITY (Fans) The second figure may be constructed as follows: 45 40 35 30 25 ш20 15 10 0 80 160 240 320 400 480 560 640 720 800 QUANTITY (Fans) Before Tax dollars Consumer SurplusS1600(1/2)(40 - 30) (320 - 0) Producer Surplus Tax Revenue Deadweight Loss After Tax dollars) $400 (1/2 (40- 35)(160 - 0) $1200 (1/2 (15 -0) (160-0) $3200 [(35 15) 160 -0 $1600 [ (1/2)(35- 15)(320 - 160) $4800 (1/2) (30-0(320-0) 0