Consumer, Producer and Community Surplus

1. Consumer, Producer and Community Surplus • How much would you be willing to pay for this? • Or this?

2. Consumer Surplus Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

3. Producer Surplus Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.

4. Community Surplus of Competitive Markets Community Surplus Equals the Sum of Consumer Surplus and Producer Surplus • Economic efficiency • Occurs where the sum of consumer surplus and producer surplus is at a maximum.

5. The incidence of taxation on Community Surplus Deadweight welfare loss from an indirect tax

6. Deadweight loss from an indirect tax £ S Before-tax situation P1 D O Q1 Q

7. Deadweight loss from an indirect tax £ S Before-tax situation Consumer surplus P1 D O Q1 Q

8. Deadweight loss from an indirect tax £ S Before-tax situation Consumer surplus P1 Producer surplus D O Q1 Q

9. Deadweight loss from an indirect tax S + tax P2 P2-tax Q2 £ S P1 D O Q1 Q

10. Deadweight loss from an indirect tax £ S + tax S 1 P2 2 3 P1 5 4 P2-tax 6 D O Q2 Q1 Q

11. Deadweight loss from an indirect tax £ S + tax S 1 P2 2 3 P1 5 4 P2-tax 6 D O Q2 Q1 Q

12. Deadweight loss from an indirect tax £ S + tax S 1 P2 2 3 P1 5 4 P2-tax 6 D O Q2 Q1 Q

13. Deadweight loss from an indirect tax Tax revenue for government £ S + tax S 1 P2 2 3 P1 5 4 P2-tax 6 D O Q2 Q1 Q

14. Deadweight loss from an indirect tax Deadweight loss from tax £ S + tax S 1 P2 2 3 P1 5 4 P2-tax 6 D O Q2 Q1 Q