Question

Taxes End of Chapter Problem

7 b. Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza.

By how much has the imposition of the tax reduced consumer surplus?

Price of pizza	Quantity of pizza demanded	Quantity of pizza supplied
$10	0	6
9	1	5
8	2	4
7	3	3
6	4	2
5	5	1
4	6	0
3	7	0
2	8	0
1	9	0

a. Reduction in consumer surplus: $

By how much has it reduced producer surplus?

b. Reduction in producer surplus: $

c. How much does Collegetown earn from this tax?

Collegetown earns: $

d. What is the deadweight loss (DWL) from the tax?

DWL: $

Answer 1

1) Reduction in consumer surplus: $3

Explanation: After the imposition of excise tax the consumer surplus is zero because he buys pizza at $9 is willing to pay just $9 for it; and earlier the equilibrium was at $7 thus there is a reduction in consumer surplus by $3

2) Reduction in producer surplus: $3

Explanation: After the imposition of excise tax the producer surplus is zero because producer receives $5 and it's cost is also $5; and earlier the equilibrium was at $7 thus there is a reduction in producer surplus by $3

3) Collegetown earns: $4

Explanation: Collegetown will total tax revenue of $4 per pizza sold

4) DWL: $2

Explanation:

Total decrease in surplus = Reduction in consumer surplus + Reduction in producer surplus = $3 + $3 = $6

Revenue = $4

Deadweight loss = $6 - $4 = $2