Question

Ken places a $20 value on a cigar, and Mark places a $17 value on it. The equilibrium price for this brand of cigar is $15. Suppose the government levies a tax of $3 on each cigar, and the equilibrium price of a cigar increases to $18. How much consumer surplus will be lost because of the imposition of the tax relative to the consumer surplus when there is no tax?

Answer 1

without tax: $ 7 consumer surplus

with tax: $ 2 consumer surplus

differece: decrease of $5

Step-by-step explanation:

the consumer surplus is the difference between the amount willing to pay for the good and the equilibrium price:

with no tax:

ken is willing to buy for 20 - 15 equilibrium price = 5

mark is willing to buy for 17 - 15 equilibrium price = 2

total 7

with taxes:

ken is willing to buy for 20 - 18 equilibrium price = 2

mark has no consumer surplus

total 2

difference: 5