Question

If taxes reduce consumer and producer surplus as well as create a deadweight loss, do we need them? Explain why or why not.

Answer 1

Answer:

Tax revenue is the dollar amount of tax collected. For an excise (or, per unit) tax, this is quantity sold multiplied by the value of the per unit tax. Tax revenue is counted as part of total surplus.  Because the tax alters the quantity that is sold in the market, it will result in a deadweight loss.The effect of the tax on the supply-demand equilibrium is to shift the quantity toward a point where the before-tax demand minus the before-tax supply is the amount of the tax. A tax increases the price a buyer pays by less than the tax. A tax causes consumer surplus and producer surplus (profit) to fall.

Explanation: