|Posted on April 16, 2014 at 10:55 AM|
When the government imposes a per-unit tax, marginal costs increase and supply shifts to the left. The producer and consumer both share the burden of the tax. As a result of the tax, the producer surplus and consumer surplus decrease. Assuming no externalities, the tax creates deadweight loss (inefficiency).
The No Bull Review diagram below illustrates the effects of a per-unit tax. P represents price before the tax, P1 is the price after the tax, Ps is the price the seller receives. The yellow region is the part of the tax that the buyer pays to the government and the green region represents what the seller pays to the government. Yellow region + green region = total tax revenue. The purple region represents the deadweight loss.
AP Microeconomics Unit 4 Role of Government