52.9k views
2 votes
Microeconomic Principles (Buckley, B) Consider a market with a dowrwward-sloped dertand and an upward sloped rupply Producer surplus is_________ when there is a tax as compared to when the is no tax: Corsumer surplis is _________ when there is a tax as compared to when there is no tax.

a. towy, Higher
b. Higher, Higher
c. Iower, lower
d. Higher, Lower

User Debracey
by
7.9k points

1 Answer

2 votes

Final answer:

Tax imposition in a market reduces both producer surplus and consumer surplus, leading to a deadweight loss. Producers receive lower prices and sell fewer units, while consumers pay higher prices and buy less. Thus, producer and consumer surpluses are lower with a tax.

Step-by-step explanation:

When a tax is imposed on a market with a downward-sloped demand curve and an upward-sloped supply curve, both producer surplus and consumer surplus are affected. A tax creates a wedge between the price consumers pay and the price producers receive, ultimately reducing the quantity sold compared to the market equilibrium without a tax. Consequently, producer surplus is lower because producers receive less for each unit sold, and they sell fewer units. Similarly, consumer surplus is also lower because consumers pay a higher price and purchase less quantity. Therefore, the presence of a tax generally leads to deadweight loss— a reduction in the total surplus.

Given these circumstances, the correct answers to the question are: Producer surplus is lower when there is a tax as compared to when there is no tax; Consumer surplus is lower when there is a tax as compared to when there is no tax. The appropriate choice would be option (c) lower, lower.

User Yogesh Malpani
by
7.9k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.