Multiple Choice
If a tax has caused the market-clearing quantity to fall to Q2, what is total economic surplus?
6. Introduction to Taxes and Subsidies
Effects of Taxes on a Market
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If a tax has caused the market-clearing quantity to fall to Q2, what is consumer surplus?
A
The area of (A)
B
The area of (A), (B), and (C)
C
The area of (A), (B), (C), (D), and (E)
D
The area of (A), (B), (C), (D), (E), and (F)
E
The area of (C) and (E)
Verified step by step guidance1
Identify the initial consumer surplus before the tax. Consumer surplus is the area between the demand curve and the price level, up to the quantity demanded. Initially, this is the area above the price level P* and below the demand curve, up to Q1.
After the tax is imposed, the market-clearing quantity falls to Q2. The new consumer surplus is the area above the new price level (PB) and below the demand curve, up to Q2.
On the graph, the new consumer surplus is represented by the area labeled (A). This is because it is the area above the price PB and below the demand curve, up to the new quantity Q2.
Understand that the tax has caused a reduction in consumer surplus. The area that was lost due to the tax is the area (B) and (C), which was part of the consumer surplus before the tax.
Conclude that the consumer surplus after the tax is the area of (A), as it is the only area above the price PB and below the demand curve up to the new quantity Q2.
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