Consumer Surplus and Deadweight Loss Lectures in MicroeconomicsCharles

Consumer Surplus and Deadweight Loss Lectures in Microeconomics-Charles W. Upton

An Application • The government now imposes a tax T on the product. What happens to consumer surplus? D P Consumer Surplus and Dead Weight Loss Q

An Application • The government now imposes a tax T on the product. What happens to consumer surplus? • Consumer Surplus P+T Declines D P Consumer Surplus and Dead Weight Loss Q* Q

An Application • The government now imposes a tax T on the product. What happens This is not a surplus? loss. to consumer The money is • Consumer Surplus P+T Declines to the transferred government, and P thus takes the place of other taxes. Consumer Surplus and Dead Weight Loss Surplus Lost to Taxes D Q* Q

An Application • The government now imposes a tax T on the product. What happens This is a totalsurplus? loss. to consumer one benefits • No Consumer Surplus P+T Declines from the Deadweight Loss Surplus Lost to Taxes D Deadweigh t Loss P Consumer Surplus and Dead Weight Loss Q* Q

An Application • The demand for a product is Q = 100 -2 p. 50 Consumer Surplus and Dead Weight Loss D 100

Taxes • The demand for a product is Q = 100 -2 p. • The good sells for 10 • The Government imposes a tax of $5 50 D 10 Consumer Surplus and Dead Weight Loss 70 80 100

Taxes • The demand for a product is Q = 100 -2 p. • The good sells for 10 • The Government imposes a tax of $5 50 D Original CS= 1600 10 Consumer Surplus and Dead Weight Loss 70 80 100

Taxes 50 • The demand for a product is Q = 100 -2 p. • The good sells for 10 • The Government imposes a tax of $5 15 D New CS = ½ x 70 x 35 = 1225 c 10 Consumer Surplus and Dead Weight Loss 70 80 100

Taxes 50 • The demand for a product is Q = 100 -2 p. • The good sells for 10 • The Government imposes a tax of $5 15 Lost to taxes 350 D New CS = ½ x 70 x 35 = 1225 c 10 Consumer Surplus and Dead Weight Loss 70 80 100

Taxes 50 • The demand for a product is Q = 100 -2 p. • The good sells for 10 • The Government imposes a tax of $5 15 D New CS = ½ x 70 x 35 = 1225 c 10 Lost to taxes 350 DW Loss Surplus and Dead ½ x 10 x 5 Consumer = 25 Weight Loss 70 80 100

Monopoly Pricing 50 • The demand for a product is Q = 100 -2 p. • A Monopolist, who can make the product for nothing, sells it $10 D 10 Consumer Surplus and Dead Weight Loss 70 80 100

Monopoly Pricing 50 • The demand for a product is Q = 100 -2 p. • A Monopolist, who can make the product for nothing, sells it $10 = $800 D 10 Consumer Surplus and Dead Weight Loss 80 100

Monopoly Pricing 50 • The demand for a product is Q = 100 -2 p. • A Monopolist, who can make the product for nothing, sells it $10 = $800 D CS = $1600 10 Consumer Surplus and Dead Weight Loss 80 100

Monopoly Pricing • The Monopolist now raises the price to $15 50 D CS = $1600 10 Consumer Surplus and Dead Weight Loss 70 80 100

Monopoly Pricing • The Monopolist now raises the price to $15 New CS = ½ x 70 x 35 = 1225 50 D 15 10 Consumer Surplus and Dead Weight Loss 70 80 100

Monopoly Pricing • The Monopolist now raises the price to $15 = $1050 50 D 15 Lost to higher price 350 CS = $1225 10 Consumer Surplus and Dead Weight Loss 70 80 100

Monopoly Pricing • The Monopolist now raises the price to $15 = $1050 Lost to higher price 350 50 D 15 CS = $1225 10 DW Loss ½ x 10 x 5 = 25 Consumer Surplus and Dead Weight Loss 70 80 100

End © 2003 Charles W. Upton Consumer Surplus and Dead Weight Loss