Consumer and Producer Surplus, Tax
Incidence and Deadweight Loss
Modules 49 & 50
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
Figure 49.1 The Demand Curve for Used Textbooks
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Copyright © 2011 by Worth Publishers
Table 49.1 Consumer Surplus When the Price of a Used Textbook Is $30
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Figure 49.2 Consumer Surplus in the Used-Textbook Market
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Calculating Consumer Surplus
$2,000
½ base x height
= ($500 x 1 mil.)/2
= $250 million
Figure 49.3 Consumer Surplus
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Copyright © 2011 by Worth Publishers
Figure 49.4 Consumer Surplus and a Fall in the Price of Used Textbooks
Ray and Anderson: Krugman’s Economics for AP, First Edition
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Figure 49.5 A Fall in the Price Increases Consumer Surplus
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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
Figure 49.6 The Supply Curve for Used Textbooks
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 49.2 Producer Surplus When the Price of a Used Textbook Is $30
Ray and Anderson: Krugman’s Economics for AP, First Edition
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Figure 49.7 Producer Surplus in the Used-Textbook Market
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Calculating Producer Surplus
½ base x height
= ($4 x 1 mil)/2
= $2 million
$1
Figure 49.8 Producer Surplus
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Figure 49.9 A Rise in the Price Increases Producer Surplus
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Figure 50.1 Total Surplus
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Market Equilibrium for Hotel Rooms
Figure 50.5 The Supply and Demand for Hotel Rooms in Potterville
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If excise tax is levied on suppliers…
Figure 50.6 An Excise Tax Imposed on Hotel Owners
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If excise tax is levied on consumers…
Figure 50.7 An Excise Tax Imposed on Hotel Guests
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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.
Tax Incidence shared
equally by producers
and consumers
Figure 50.10 The Revenue from an Excise Tax
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Figure 50.11 A Tax Reduces Consumer and Producer Surplus
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Figure 50.12 The Deadweight Loss of a Tax
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Inelastic Demand, Elastic Supply
Consumers bear more
of the tax incidence of
the $1 tax:
$0.95 v. $0.05
Figure 50.8 An Excise Tax Paid Mainly by Consumers
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Elastic Demand, Inelastic Supply
Producers bear more
of the tax incidence of
the $6 tax:
$4.50 v. $1.50
Figure 50.9 An Excise Tax Paid Mainly by Producers
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