1. Consumer and Producer Surplus, Tax Incidence and Deadweight Loss
Modules 49 & 50

2. Consumer Surplus
There are some people who would be willing to pay more than the market price for a good
As a result of market equilibrium, they pay less.
The difference is their consumer surplus

3. Figure The Demand Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

4. Table Consumer Surplus When the Price of a Used Textbook Is $30 Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

5. Figure Consumer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

6. Calculating Consumer Surplus
$2,000
½ base x height
= ($500 x 1 mil.)/2
= $250 million
Figure Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

7. Figure Consumer Surplus and a Fall in the Price of Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

8. Figure A Fall in the Price Increases Consumer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Producer Surplus
There are some people who would be willing to sell a good for less than the market price
As a result of market equilibrium, they receive more money.
The difference is their producer surplus

10. Figure The Supply Curve for Used Textbooks Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

11. Table Producer Surplus When the Price of a Used Textbook Is $30 Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Figure Producer Surplus in the Used-Textbook Market Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

13. Calculating Producer Surplus
½ base x height = ($4 x 1 mil)/2
= $2 million $1
Figure Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

14. Figure A Rise in the Price Increases Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

15. Figure Total Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

16. Market Equilibrium for Hotel Rooms
Figure The Supply and Demand for Hotel Rooms in Potterville Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

17. If excise tax is levied on suppliers…
Figure An Excise Tax Imposed on Hotel Owners Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

18. If excise tax is levied on consumers…
Figure An Excise Tax Imposed on Hotel Guests Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

19. Tax Incidence
The tax incidence indicates what share of the tax burden is borne by consumers and producers.
In the hotel room case, the tax incidence is shared equally – out of the $40 tax, consumers paid $20 more and suppliers received $20 less.

20. Tax Incidence shared equally by producers and consumers
Figure The Revenue from an Excise Tax Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

21. Figure A Tax Reduces Consumer and Producer Surplus Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

22. Figure The Deadweight Loss of a Tax Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

23. Inelastic Demand, Elastic Supply
Consumers bear more of the tax incidence of the $1 tax:
$0.95 v. $0.05
Figure An Excise Tax Paid Mainly by Consumers Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

24. Elastic Demand, Inelastic Supply
Producers bear more of the tax incidence of the $6 tax:
$4.50 v. $1.50
Figure An Excise Tax Paid Mainly by Producers Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers