AP_Krugman_Textbook

Meanwhile, the fall in the price received by producers leads to a fall in producer sur-
plus. This, too, is equal to the sum of the areas of a rectangle and a triangle. The loss in
producer surplus is the sum of the areas of the dark red rectangle labeled Cand the
light red triangle labeled Fin Figure 50.11.
Of course, although consumers and producers are hurt by the tax, the government
gains revenue. The revenue the government collects is equal to the tax per unit sold, T,
multiplied by the quantity sold, QT.This revenue is equal to the area of a rectangle QT
wide and Thigh. And we already have that rectangle in the figure: it is the sum of rec-
tangles AandC.So the government gains part of what consumers and producers lose
from an excise tax.
But a portion of the loss to producers and consumers from the tax is not offset by a
gain to the government—specifically, the two triangles BandF.The deadweight loss
caused by the tax is equal to the combined area of these two triangles. It represents the
total surplus lost to society because of the tax—that is, the amount of surplus that would
have been generated by transactions that now do not take place because of the tax.
Figure 50.12 on the next page is a version of Figure 50.11 that leaves out rectangles A
(the surplus shifted from consumers to the government) and C(the surplus shifted
from producers to the government) and shows only the deadweight loss, drawn here as
a triangle shaded yellow. The base of that triangle is equal to the tax wedge, T;the
height of the triangle is equal to the reduction in the quantity transacted due to the
tax, QE−QT. Clearly, the larger the tax wedge and the larger the reduction in the quan-
tity transacted, the greater the inefficiency from the tax. But also note an important,
contrasting point: if the excise tax somehow didn’treduce the quantity bought and sold
in this market—if QTremained equal to QEafter the tax was levied—the yellow triangle
would disappear and the deadweight loss from the tax would be zero. So if a tax does
notdiscourage transactions, it causes no deadweight loss. In this case, the tax simply
shifts surplus straight from consumers and producers to the government.
Using a triangle to measure deadweight loss is a technique used in many economic ap-
plications. For example, triangles are used to measure the deadweight loss produced by
types of taxes other than excise taxes. They are also used to measure the deadweight loss
produced by monopoly, another kind of market distortion. And deadweight-loss trian-
gles are often used to evaluate the benefits and costs of public policies besides taxation—
such as whether to impose stricter safety standards on a product.

module 50 Efficiency and Deadweight Loss 507

Section 9 Behind the Demand Curve: Consumer Choice

figure 50.11

A Tax Reduces Consumer and

Producer Surplus

Before the tax, the equilibrium price and quantity

arePEandQE,respectively. After an excise tax of T

per unit is imposed, the price to consumers rises

toPCand consumer surplus falls by the sum of the

dark blue rectangle, labeled A,and the light blue

triangle, labeled B.The tax also causes the price

to producers to fall to PP;producer surplus falls by

the sum of the dark red rectangle, labeled C,and

the light red triangle, labeled F.The government

receives revenue from the tax, QT×T,which is

given by the sum of the areas AandC.AreasB

andFrepresent the losses to consumer and pro-

ducer surplus that are not collected by the govern-

ment as revenue; they are the deadweight loss to

society of the tax.

QE Quantity

S

E

D

Price

QT

PE

PC

PP

C

A B

F

Excise

tax = T

Fall in consumer

surplus due to tax

Fall in producer

surplus due to tax