1. Managerial Economics-Charles W. Upton Consumer Surplus and Deadweight Loss

2. An Application The government now imposes a tax T on the product. What happens to consumer surplus? P D Q

3. Consumer Surplus and Deadweight Loss An Application The government now imposes a tax T on the product. What happens to consumer surplus? Consumer Surplus Declines P D Q P+T Q*

4. Consumer Surplus and Deadweight Loss An Application The government now imposes a tax T on the product. What happens to consumer surplus? Consumer Surplus Declines P D Q P+T Surplus Lost to Taxes Q* This is not a loss. The money is transferred to the government, and thus takes the place of other taxes.

5. Consumer Surplus and Deadweight Loss An Application The government now imposes a tax T on the product. What happens to consumer surplus? Consumer Surplus Declines P D Q P+T Surplus Lost to Taxes Deadweigh t Loss Q* This is a total loss. No one benefits from the Deadweight Loss

6. Consumer Surplus and Deadweight Loss An Application The demand for a product is Q = 100-2p. D 50 100

7. Consumer Surplus and Deadweight Loss Taxes The demand for a product is Q = 100-2p. The good sells for 10 The Government imposes a tax of $5 10 D 80 50 70 100

8. Consumer Surplus and Deadweight Loss Taxes The demand for a product is Q = 100-2p. The good sells for 10 The Government imposes a tax of $5 10 D 80 50 70 100 Original CS= 1600

9. Consumer Surplus and Deadweight Loss Taxes The demand for a product is Q = 100-2p. The good sells for 10 The Government imposes a tax of $5 10 D 80 50 70 100 New CS = ½ x 70 x 35 = 1225 c 15

10. Consumer Surplus and Deadweight Loss Taxes The demand for a product is Q = 100-2p. The good sells for 10 The Government imposes a tax of $5 10 D 80 50 70 100 New CS = ½ x 70 x 35 = 1225 c Lost to taxes 350 15

11. Consumer Surplus and Deadweight Loss Taxes The demand for a product is Q = 100-2p. The good sells for 10 The Government imposes a tax of $5 10 D 80 50 70 100 New CS = ½ x 70 x 35 = 1225 c Lost to taxes 350 15 DW Loss ½ x 10 x 5 = 25

12. Consumer Surplus and Deadweight Loss Monopoly Pricing The demand for a product is Q = 100-2p. A Monopolist, who can make the product for nothing, sells it $10 10 D 80 50 70 100

13. Consumer Surplus and Deadweight Loss Monopoly Pricing The demand for a product is Q = 100-2p. A Monopolist, who can make the product for nothing, sells it $10  = $800 10 D 80 50 100

14. Consumer Surplus and Deadweight Loss Monopoly Pricing The demand for a product is Q = 100-2p. A Monopolist, who can make the product for nothing, sells it $10  = $800 10 D 80 50 100 CS = $1600

15. Consumer Surplus and Deadweight Loss Monopoly Pricing The Monopolist now raises the price to $15 10 D 80 50 70 100 CS = $1600

16. Consumer Surplus and Deadweight Loss Monopoly Pricing The Monopolist now raises the price to $15 10 D 80 50 70 100 New CS = ½ x 70 x 35 = 1225 15

17. Consumer Surplus and Deadweight Loss Monopoly Pricing The Monopolist now raises the price to $15  = $1050 10 D 80 50 70 100 CS = $1225 Lost to higher price 350 15

18. Consumer Surplus and Deadweight Loss Monopoly Pricing The Monopolist now raises the price to $15  = $1050 10 D 80 50 70 100 CS = $1225 Lost to higher price 350 15 DW Loss ½ x 10 x 5 = 25

19. Consumer Surplus and Deadweight Loss End ©2003 Charles W. Upton