Micro Foundations · intermediate
What moves on the Consumer & Producer Surplus diagram
Taxes cut quantity below the efficient level; the surplus lost beyond tax revenue is deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen..
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change., total surplus is the whole shaded area.
A per-unit tax shifts supply up: quantity falls, the wedge opens.
Watch both triangles shrink. The lost area that nobody collects, not buyers, sellers, or government, is deadweight lossdeadweight lossValue that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen..
Examiners ask this as: tax deadweight loss, surplus shrinks, welfare cost of tax.
Other scenarios on Consumer & Producer Surplus