The Welfare Effects of Taxation.

You have been hired as the new economic advisor of Baltimore's City Council. Your first suggestion as economic

advisor is to eliminate the tax on your favorite good: pizza. You want to convince people this is a good measure so

you show them the graph.

1. Identify the following areas in the graph.

(a) Consumer surplus with tax.

(b) Producer surplus with tax.

(c) Tax revenue.

(d) Total surplus with tax.

(e) Consumer surplus without tax.

(f) Producer surplus without tax.

(g) Increase in consumer surplus by eliminating the tax.

(h) Increase in producer surplus by eliminating the tax.

(i) Part of the tax revenue paid by consumers.

(j) Part of the tax revenue paid by producers.

(k) Value to buyers of increasing quantity from Q_tax to Q*

.

(l) Cost to producers of increasing quantity from Q_tax to Q*

.

(m) Change in total surplus of increasing quantity from Q_tax to Q*

.

2. Explain with your own words why eliminating the tax on pizza would be a good policy from the point of view

of efficiency.