Question

David walks Carolyn’s dog once a day for $50 per week. Carolyn values this service at $60 a week, while the opportunity cost of David’s time is $30 per week. Suppose the government places a tax of $35 per week on dog walkers. After the tax, the total surplus is

Group of answer choices

a) $20

b) $50

c) $25

d) $0

Answer 1

The total surplus after a $35 tax on dog walking service becomes $0, as the tax exceeds the initial combined consumer and producer surplus, disincentivizing the transaction between David and Carolyn.

Step-by-step explanation:

The question involves examining the effects of a tax on consumer and producer surplus within the context of marginal (marginal) economics. David walking Carolyn's dog creates an initial total surplus (consumer surplus plus producer surplus) of $30, which is the difference between Carolyn's valuation ($60) and David's opportunity cost ($30). When the government enacts a $35 tax on dog walking, this tax exceeds the initial surplus and thus eliminates it, leading to a total surplus of $0.

Starting with the initial consumer surplus of $10 ($60 value - $50 payment) and the initial producer surplus of $20 ($50 payment - $30 opportunity cost), the new tax leaves neither David nor Carolyn with any surplus. The value Carolyn places on the service minus the cost of the tax still leads to a net loss: $60 - $50 (payment) - $35 (tax) = -$25. Similarly, David's surplus is now negative as well: $50 (payment) - $30 (opportunity cost) - $35 (tax) = -$15. Since both parties are at a loss, the trade would not occur, and the total surplus is indeed $0.