Question

(c) Will consumer price rise by the full tax? No, not necessarily. The change in the price consumers pay (Pc − P*) is generally less than the size of the tax t unless supply is perfectly inelastic (vertical), in which case consumers do pay the full tax. Tax incidence (how the burden is shared between buyers and sellers) depends on the relative price elasticities of demand and supply: the side of the market that is less elastic (less responsive) bears a larger share of the tax burden.

(d) Is the loss in consumer + producer surplus greater than, less than, or equal to government tax revenue? In general the combined loss in consumer and producer surplus is greater than the tax revenue collected. Explanation: tax revenue equals t × Q1 (a rectangle whose height is t and width is Q1). The total surplus loss to buyers and sellers equals the tax revenue plus an additional deadweight loss triangle created by the reduction in quantity traded (the value of mutually beneficial trades that no longer occur). Exception: if demand or supply is perfectly inelastic so quantity does not change, there is no deadweight loss and the combined loss in surplus equals the tax revenue. su

summarize the two different questions in 2 different sentences for each question

Answer 1

(c) Consumers do not necessarily pay the full tax: the price increase they face is generally less than t unless supply is perfectly inelastic. Tax incidence depends on relative elasticities—whichever side (buyers or sellers) is less elastic bears more of the tax burden.

(d) The combined loss in consumer and producer surplus is generally greater than government tax revenue because the tax creates a deadweight loss from reduced trades. If demand or supply is perfectly inelastic so quantity does not change, there is no deadweight loss and the surplus loss equals the tax revenue.