Question

Please explain to the class how to calculate Total Social Welfare (total surplus) with and without the presence of an excise tax in approximately 100 words.

Answer 1

Without tax.

The total surplus is the area of consumer surplus + producer surplus. Without exice tax the consumer surplus is the area of below Demand curve and above price, and producer surplus is the area of above supply curve and below price.

with exice tax

the total surplus = consumer surplus + producer surplus + government revenue.

due to tax the dead weight loss arises which is loss for the economy and not included in the total surplus. Both consumer and producer surplus reduces and government revenue increases.