Question

4. The government places a tax on the suppliers of socks.

(a) Illustrate the effect of this tax on equilibrium price and quantity in the sock market (drawing two graphs will be the easiest way to do this) Identify the following areas both before and after the imposition for the tax: consumer surplus, producer surplus, tax revenue and dead-weight loss.

(b) Properly label the new quantity in the market after the tax, the price that consumers pay and the price that producers keep after the tax is in place.

Answer 1

Sol 4 :

Before imposing of tax by government

Price paid by consumers = Price recieved by producers

Consumer surplus and producer surplus are larger than after tax

when government imposes tax on suppliers of socks.

Price paid by consumers = Increases

Price received by producers = Decreases

Deadweigh loss also increases

Consumer surplus = Decreases

Producers surplus = decreases

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