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.

Before TaxEquilibriumConsumer SurplusProducer Surplus0601201802403003604204805406002502252001751501251007550250PRICE (Dollars per bike)QUANTITY (Bikes)DemandSupply

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 $100 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.

After TaxTax RevenueConsumer SurplusProducer SurplusDeadweight Loss0601201802403003604204805406002502252001751501251007550250PRICE (Dollars per bike)QUANTITY (Bikes)DemandSupplyTax Wedge

Complete the following table by using the previous graphs to determine the values of consumer and producer surplus before the tax, and consumer surplus, producer surplus, tax revenue, and deadweight loss after the tax.

Note: You can determine the areas of different portions of the graph by selecting the relevant area.

	Before Tax	After Tax
(Dollars)	(Dollars)
Consumer Surplus
Producer Surplus
Tax Revenue	0
Deadweight Loss	0