7 Understanding the implications of taxes on welfare The fol

7. Understanding the implications of taxes on welfare The following graph represents the demand and supply for an imaginary good called a pinckney. The black point (plus symbol) indicates the pre-tax equilibrium. Suppose the government has just decided to impose a tax on this market; the grey points (star symbol) indicate the after-tax scenario. Demand Supply 32.50 27.50 + 10.5 13.5 QUANTITY (Pinckneys)

Solution

Equilibrium Quantity after tax = $10.5

Explanation: This is the new quantity where the consumers and producers are happy to buy and sell with different prices

Price consumers pay after tax = $32.50

Explanation : Here after tax is paid, the top grey star ($32.50) shows the price paid by consumers and the bottom star ( $22.50 ) shows the price paid by producers.

Per-unit tax = $32.50 - $22.50 = $10

Explanation: Per unit tax = difference between the price paid by consumers and the price paid by producers

Producer surplus after the tax is imposed = F

Explanation: Producer surplus is the difference between the price a seller receives and the lowest amount a producer is willing to receive. Graphically, this area is above the supply curve , below the actual price recieved by producers after tax and left of the equilibrium quantity.

Deadweight loss after the tax is imposed = C + E

Explanation: Deadweight loss is the loss of economic efficiency that can occur when equilibrium is not achieved. Graphically, it is the area left to the old equilibrium quanity and right to the new equlibrium quantity.

Consumer surplus before the tax is imposed = A+ B + C

Explanation: Consumer surplus is the difference between the willingness of buyer to pay and the buyer actually pays. Graphically, here it is the area, above the price actually paid by the consumer before tax and below the demand curve, left of the equilibrium quantity.