Table of contents

0. Basic Principles of Economics1h 5m
1. Reading and Understanding Graphs59m
2. Introductory Economic Models1h 10m
3. The Market Forces of Supply and Demand2h 26m
4. Elasticity2h 26m
5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
6. Introduction to Taxes and Subsidies1h 46m
7. Externalities1h 12m
8. The Types of Goods1h 13m
9. International Trade1h 16m
10. The Costs of Production2h 35m
11. Perfect Competition2h 23m
12. Monopoly2h 13m
13. Monopolistic Competition1h 9m
14. Oligopoly1h 26m
15. Markets for the Factors of Production1h 26m
16. Income Inequality and Poverty35m
17. Asymmetric Information, Voting, and Public Choice39m
18. Consumer Choice and Behavioral Economics1h 16m

6. Introduction to Taxes and Subsidies

Effects of Taxes on a Market

Microeconomics

6. Introduction to Taxes and Subsidies

Effects of Taxes on a Market

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Multiple Choice

If a tax has caused the market-clearing quantity to fall to Q2, what is total economic surplus?

The area of (A) and (F)

The area of (D), (E), and (F)

The area of (A), (B), (D), and (F)

The area of (A), (B), (C), (D), (E), and (F)

The area of (C) and (E)

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Verified step by step guidance

Identify the initial market equilibrium without tax, which is at quantity Q1 and price P*. This is where the supply and demand curves intersect.

Understand that the imposition of a tax shifts the supply curve upwards, leading to a new equilibrium at quantity Q2, with buyers paying price PB and sellers receiving price PS.

Recognize that total economic surplus is the sum of consumer surplus and producer surplus. Consumer surplus is the area above the price level and below the demand curve, while producer surplus is the area below the price level and above the supply curve.

After the tax, consumer surplus is reduced to the area above PB and below the demand curve up to Q2, which is area A. Producer surplus is reduced to the area below PS and above the supply curve up to Q2, which is area F.

The total economic surplus after the tax is the sum of the remaining consumer and producer surplus, which is the area of (A), (B), (D), and (F). This is because areas B and D are part of the consumer and producer surplus up to Q2, and area F is the producer surplus below PS.