Friday
October 31, 2014

Homework Help: Economics

Posted by G on Sunday, April 20, 2008 at 7:42am.

I am working on the cost of taxation.

Question:
The market for pizza is characterized by a downward-sloping demand curve and upward-sloping supply curve.

Suppose that the govenment forces each pizzeria to pay a $1.00 tax on each pizza sold. Illustrate the effect of this tax on the pizza maarket, being sure to label the concumer suprplus, producer surplus, government revenue, and deadweight loss. How does each area compare to the pre-tax case?

I understand what has happened and I can draw the graph. The supply curve has shifted to the left from supply 1 to supply 2. I can show the the new prices, consumer, producer surplus and deadwight loss. I know the area from the new price the sellers receive the new price the buyers pay is the tax revenue paid to the government.

What is throwing me is the area that is now between the supply 1 and supply 2. I know where the deadwight loss is and I can draw and labelit. What I am not sure of if part of the shift if now part of the tax revenue? On the consumer side between supply 1 and 2 is a piece of their surplus now tax revenue? On proucer side is on piece of their surplus now tax revenue and another part just loss to the producer surplus (not deadweight loss)?

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