I had a question on how an excise tax per unit of good produced for a producer would affect total revenue for a producer of that good. The graph is that supply is perfectly elastic (horizontal) and the demand is normal or relatively unit elastic (any standard demand curve basically) and a tax is imposed on producer. Does the total revenue increase, decrease or stay the same for the producer and what would happen to producer and consumer surplus (decrease, increase or stay the same)???
2
-
$\begingroup$ Hint: draw a graph with horizontal supply curve and downward sloping demand curve. Tax simply shifts supply upwards. $\endgroup$– Herr K.May 14, 2017 at 5:50
-
$\begingroup$ so total revenue decreases?? $\endgroup$– TolgaMay 14, 2017 at 6:27
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
1
Supply shifts from S to S1, which leads to price rising from P to P1 and quantity exchanged dropping from Q to Q1. Recall the formula for total revenue TR=Price*Quantity, so in the diagram the initial revenue level is OPBQ, and after the tax is OP1AQ1. The change in revenue will depend on the size of the tax and the size of the decrease in quantity consumed. Producer surplus is zero both before and after the tax, while consumer surplus decreases from CBP to CAP1.
-
$\begingroup$ Thank you very much. I realized that total revenue for producers would be maximized when it is the unit elastic part of the demand curve, I think it depends on that in this case. $\endgroup$– TolgaMay 14, 2017 at 12:14