Question

John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement?

Answer 1

A maximum tax government can impose is equal to the total surplus per unit in the market

per unit total surplus =maximum willingness to pay - minimum willingness to accept

a minimum willingness to accept is equal to the opportunity cost of the worker that is $15

the opportunity cost is the best alternative to working for Johan and Johan can substitute from this work to a different work if he gets paid less than $15.

maximum willingness to pay is $25

tax =25-15

=$10

the maximum of $10 tax per week will not hurt the agreement between Johan and Willa.