Question

Draw the market for ice cream with 2$ tax on the price of ice cream on sellers.

1. Label on your graph the price set by the market, the quantity set by the market, the price the buyer pays, the price the seller gets, and the quantity demanded after the tax.
2. Show the area of consumer surplus.
3. Show the area of producer surplus.
4. Show the area of the DWL.
5. Show the area of the tax revenue

Answer 1

The tax increases the costs to the sellers so they cut the production of the ice creams, the supply decreases and the supply curve shifts to the left. The price price that the buyer pays increases. This is shown by the below graph.

When there is a tax both the producer and the consumer surplus decreases. The government collects the revenue and the there is a dead weight loss associated with it.