TutorOn by Sanath Withanage

Question:

[Based on standard specific tax diagram] If a specific tax (unit tax) is levied on the product in this market by the government, the producer surplus after the tax is the area
(1) A+B+F.
(2) B+E+C+F+D.
(3) C+F+D.
(4) D.
(5) E+F+H.

Correct Answer:

(4)

Answer Explanation:

In standard economic diagrams evaluating tax incidence, an indirect tax shifts the supply curve upward. The new Producer Surplus is the area above the original supply curve and below the net price actually received by the seller after paying the tax to the government. This is represented by the lower triangle, typically labeled area D.

Topic: Taxation Year: 2017