Question

When the government imposes an excise tax in a market with a downward-sloping demand curve and an upward-sloping supply curve: _________.

a. consumer surplus falls, producer surplus falls, and a deadweight loss occurs.
b. consumer surplus falls.
c. producer surplus falls.
d. a deadweight loss occurs.

Answer 1

A

Step-by-step explanation:

Tax is a compulsory sum levied on the price of goods and services. It increases the price of goods and services

Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.

Consumer surplus = willingness to pay – price of the good

Producer surplus is the difference between the price of a good and the least price the seller is willing to sell the product

Producer surplus = price – least price the seller is willing to accept

If tax increases the price of the good, consumer surplus would reduce

For example, willingness to pay is $20, price before tax is $5 and price after tax is $10. consumer surplus becomes $10 when it was $15 initially

Tax reduces the amount that would be received by the seller. This reduces consumer surplus.

Deadweight loss is the decrease in quantity demanded as a result of tax. Because tax increases price, the quantity demanded would reduce