Consumer and Producer Surplus, Tax Incidence and Deadweight Loss Modules 49 & 50

Consumer Surplus There are some people who would be willing to pay more than the market price for a good As a result of market equilibrium, they pay less. The difference is their consumer surplus

Figure 49.1 The Demand Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Table 49.1 Consumer Surplus When the Price of a Used Textbook Is $30 Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.2 Consumer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Calculating Consumer Surplus $2,000 ½ base x height = ($500 x 1 mil.)/2 = $250 million Figure 49.3 Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.4 Consumer Surplus and a Fall in the Price of Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.5 A Fall in the Price Increases Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Producer Surplus There are some people who would be willing to sell a good for less than the market price As a result of market equilibrium, they receive more money. The difference is their producer surplus

Figure 49.6 The Supply Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Table 49.2 Producer Surplus When the Price of a Used Textbook Is $30 Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.7 Producer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Calculating Producer Surplus ½ base x height = ($4 x 1 mil)/2 = $2 million $1 Figure 49.8 Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 49.9 A Rise in the Price Increases Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 50.1 Total Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Market Equilibrium for Hotel Rooms Figure 50.5 The Supply and Demand for Hotel Rooms in Potterville Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

If excise tax is levied on suppliers… Figure 50.6 An Excise Tax Imposed on Hotel Owners Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

If excise tax is levied on consumers… Figure 50.7 An Excise Tax Imposed on Hotel Guests Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Tax Incidence The tax incidence indicates what share of the tax burden is borne by consumers and producers. In the hotel room case, the tax incidence is shared equally – out of the $40 tax, consumers paid $20 more and suppliers received $20 less.

Tax Incidence shared equally by producers and consumers Figure 50.10 The Revenue from an Excise Tax Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 50.11 A Tax Reduces Consumer and Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 50.12 The Deadweight Loss of a Tax Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Inelastic Demand, Elastic Supply Consumers bear more of the tax incidence of the $1 tax: $0.95 v. $0.05 Figure 50.8 An Excise Tax Paid Mainly by Consumers Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

Elastic Demand, Inelastic Supply Producers bear more of the tax incidence of the $6 tax: $4.50 v. $1.50 Figure 50.9 An Excise Tax Paid Mainly by Producers Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers