Question

Consider a simple opportunity for​ trade: You are renting a new condo and the previous tenant offers to sell her old couch. You are the sole buyer and you have a willingness to pay of ​$ 190. The previous tenant is the sole seller and has a willingness to accept of ​$ 110. Assuming you and the previous tenant arrive at a mutually beneficial​ agreement, the social surplus will be ​$ nothing . Suppose the condo association imposes a tax of ​$ 60 ​(i.e., a​ tax) for each item left in the condo during the​ move-in/move-out. Given the​ information, the social surplus after the imposition of the tax will ▼ remain unchanged increase decrease . Suppose the fee were raised to ​$ 100. In this​ case, the social surplus will ▼ increase fall to zero remain unchanged and the deadweight loss will be ​$ ▼ 80 50 0 .

Answer 1

In the first case, the bargain price will lie between the willingness to pay and the willingness to accept. This indicates that the total social surplus will be the difference between $190 and $110 which is $80.

Now that a tax is imposed which is worth $60. This indicates that the willingness to pay will still be $190 but the willingness to accept is now increased due to tax. Thus, social surplus will decrease

Now the tax is increased to $100. This will eliminate all the bargaining benefits so that now the social surplus falls to zero is there is no transaction taking place. This results in a dead weight loss of $80.