Question

Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price. What is the change in producer sur- plus, change in consumer surplus, and deadweight loss? a. $0, $0, $10 h b. $0, -$10, $0 c. +$10, -$10, $10 d. +$10,-$10, $0

Answer 1

Answer:

b. $0, -$10, $0

Explanation:

Sam is the producer, and he was getting $50 for moving Sofia's lawn. When the government imposes a tax of $10 on his activity, he now receives $60, but because $10 of those $60 is paid in taxes, his surplus remains the same: $50, so the change in the producer's surplus is $0.

Sofia is the consumer, and she was paying $50, but now she pays $60, thus, her consumer surplus has changed by -$10.

The sum of the change in consumer and producer surplus is $10 ($0 + $10), which is the same as the growth of government revenue from the taxes imposed: $10, therefore, the deadweight loss is $0.