An article claims that "resulting revenues are an important part of the equation

Economics Dec 09, 2020

An article claims that "resulting revenues are an important part of the equation." Use a demand and supply diagram to illustrate and explain the Government revenues and the changes in consumer surplus and producer surplus, and the dead weight loss, due to an imposition of a tax.

Expert Solution

As the tax is imposed then the supply curve shifts leftward with the same demand curve such that the price increases and output decrease in an economy. It reduces both consumer surplus and producer surplus and generates total revenue in an economy.

In the above diagram, as the supply curve shifts from SS to SS' then the consumer surplus reduces from ABC to AED and the producer surplus reduces from BCH to FGH. The total revenue is generated as the area EDGF. The deadweight loss is the area of DBG.

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