Principles of Microeconomics, 7th Edition

Published by South-Western College
ISBN 10: 128516590X
ISBN 13: 978-1-28516-590-5

Chapter 8 - Part III - Application: The Costs of Taxation - Questions for Review - Page 168: 1

Answer

Consumer and producer surplus decrease. The decrease in consumer and producer surplus is greater than the tax revenue. This is because there is also a dead weight loss.

Work Step by Step

Since a tax is put on the product, the sellers have to increase the price of it, but do not make any profits from that increase so do not want to make more. Furthermore, since the price goes up, the demand decreases. This means that less are sold for the same profit. Although there is tax revenue, the decrease in quantity demanded creates dead weight loss.
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