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Consumer and Producer Surplus, Tax Incidence and Deadweight Loss
Modules 49 & 50
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Consumer Surplus
• There are some people who would be willing to pay more than the market price for a good
• As a result of market equilibrium, they pay less.
• The difference is their consumer surplus
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Figure 49.1 The Demand Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Table 49.1 Consumer Surplus When the Price of a Used Textbook Is $30Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 49.2 Consumer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 49.3 Consumer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
Calculating Consumer Surplus½ base x height= ($500 x 1 mil.)/2= $250 million
$2,000
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Figure 49.4 Consumer Surplus and a Fall in the Price of Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 49.5 A Fall in the Price Increases Consumer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Producer Surplus
• There are some people who would be willing to sell a good for less than the market price
• As a result of market equilibrium, they receive more money.
• The difference is their producer surplus
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Figure 49.6 The Supply Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Table 49.2 Producer Surplus When the Price of a Used Textbook Is $30Ray and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 49.7 Producer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 49.8 Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
$1
Calculating Producer Surplus½ base x height = ($4 x 1 mil)/2= $2 million
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Figure 49.9 A Rise in the Price Increases Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 50.1 Total SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 50.5 The Supply and Demand for Hotel Rooms in PottervilleRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
Market Equilibrium for Hotel Rooms
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Figure 50.6 An Excise Tax Imposed on Hotel OwnersRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
If excise tax is levied on suppliers…
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Figure 50.7 An Excise Tax Imposed on Hotel GuestsRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
If excise tax is levied on consumers…
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Tax Incidence
• The tax incidence indicates what share of the tax burden is borne by consumers and producers.
• In the hotel room case, the tax incidence is shared equally – out of the $40 tax, consumers paid $20 more and suppliers received $20 less.
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Figure 50.10 The Revenue from an Excise TaxRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
Tax Incidence shared equally by producers and consumers
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Figure 50.11 A Tax Reduces Consumer and Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 50.12 The Deadweight Loss of a TaxRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
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Figure 50.8 An Excise Tax Paid Mainly by ConsumersRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
Inelastic Demand, Elastic Supply
Consumers bear more of the tax incidence of the $1 tax:$0.95 v. $0.05
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Figure 50.9 An Excise Tax Paid Mainly by ProducersRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers
Elastic Demand, Inelastic Supply
Producers bear more of the tax incidence of the $6 tax:$4.50 v. $1.50