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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?

      a. $0, $0, $10

    b. $0, −$10, $0

    c. +$10, −$10, $10

    d. +$10, −$10, $0

To determine
The change in consumer surplus, producer surplus and deadweight loss.

Explanation

The tax is the unilateral payment from the people to the government. Tax is the main source of income of the government which can be used for carrying on the public expenditure of the government. The main types of taxes include the income tax, wealth tax and the professional tax.

When a tax is imposed on the commodity, it will lead to an increase in the price from the equilibrium level and the price to the consumer rises which will reduce the consumer surplus. The price received by the sellers also decline which will reduce the producer surplus in the economy. Thus, the total surplus which is the summation of the consumer surplus and the producer surplus will fall and this fall in the total surplus due to taxation is known as the deadweight loss due to tax.

The price of mowing the lawn was $50 before the introduction of the mowing tax. After the imposition of the mowing tax of $10, the price increases to $60. The $10 from the new price goes to the government and the producer gets only $50 as earlier. This means that there is no change in the producer surplus due to tax. The price paid by the consumer increases by $10 and thus, due to the tax, the consumer surplus decreases by -$10. Since the fall in the consumer surplus and producer surplus summation is $10 which is equal to the increase in the total revenue through tax of $10, there is no change in the deadweight loss in the economy.

Option (b):

Due to the tax, there is no change in the producer surplus; there is the fall in the consumer surplus by -$10, and no change in the deadweight loss...

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