2. Taxes and welfare Consider the market for mountain bikes. The following graph shows the demand and supply for mountain bikes before the government imposes any taxes. First, use the black point (plus symbol) to indicate the equilibrium price and quantity of mountain bikes in the absence of a tax. Then use the green point (triangle symbol) to shade the area representing total consumer surplus (CS) at the equilibrium price. Next, use the purple point (diamond symbol) to shade the area representing total producer surplus (PS) at the equilibrium price.

Suppose the government imposes an excise tax on mountain bikes. The black line on the following graph shows the tax wedge created by a tax of $40 per bike.

First, use the tan quadrilateral (dash symbols) to shade the area representing tax revenue. Next, use the green point (triangle symbol) to shade the area representing total consumer surplus after the tax. Then, use the purple point (diamond symbol) to shade the area representing total producer surplus after the tax. Finally, use the black point (plus symbol) to shade the area representing deadweight loss.

Before Tax 200 180 160 Demand 40 20 100 w 80 Supp 60 40 20 0 50 00 50 200 250 300 350 400 450 500 QUANTITY Bikes Equilibrium Consumer Surplus Producer Surplus