Question

Aiming at reducing air pollution, the government decided to reduce the country’s use of gasoline by imposing an $1 tax on each gallon of gasoline sold. Does the total surplus (TS= society's welfare= consumer surplus+ producer surplus+ government gain/loss) increases or decreases with the tax?

A. is unchanged

B. Decreases

C. Increases

D. Not enough information to conclude

Answer 1

A. False, when there is a change in any of the elements used for calculating total surplus, then the total surplus ultimately gets affected, so it can’t remain unchanged.
B. False, increase in tax will result an increase in government’s gain, and when there is an increase in any of the elements used for the calculation of total surplus, the total surplus can’t be decreased.
C. True, for reduction of air pollution, when the government decides to impose $1 tax on each gallon of gasoline sold, the government gain will increase, as a result the total surplus will increase in total.
D. False, the information given is enough to conclude the final result.