Consumer and Producer Surplus, Tax Incidence and Deadweight Loss

Modules 49 & 50

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

Figure 49.1 The Demand Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

Figure 49.2 Consumer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

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

Figure 49.5 A Fall in the Price Increases Consumer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

Figure 49.6 The Supply Curve for Used TextbooksRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

Figure 49.7 Producer Surplus in the Used-Textbook MarketRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

Figure 49.9 A Rise in the Price Increases Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 50.1 Total SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

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…

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…

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.

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

Figure 50.11 A Tax Reduces Consumer and Producer SurplusRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

Figure 50.12 The Deadweight Loss of a TaxRay and Anderson: Krugman’s Economics for AP, First EditionCopyright © 2011 by Worth Publishers

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

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