I would like a broef explanation of the andwer too because I am bot sure what is
ID: 1107881 • Letter: I
Question
I would like a broef explanation of the andwer too because I am bot sure what is going on between the tax and social surplus, thank you Page 12 of 15 21. The graph below represents the competitive market for widgets Social Cost Supply 9 A byproduct of widgets production is cyanide, which is ultimately released into the environment. The marginal damage generated by the cyanide is reflected in the marginal social cost curve above. The government imposes a $4/unit tax on production of widgets. What is the change in social surplus as a consequence of the tax (relative to the freely operating market)? (a) Social surplus falls by the area E+H (b) Social surplus falls by the area A+B. (c) Social surplus increases by the area E+H. (d) Social surplus increases by the area B.Explanation / Answer
Question 21
Imposition of tax on a market distorts the market.
It raises the price paid by the buyers and reduces the price received by the sellers. It also reduces the quantity traded and creates deadweight loss.
Freely operating market for widget was in equilibrium at the price of $10 per widget.
However, with imposition of a tax of $4 per widget, the price paid by consumers have increased to $12 per widget while price received by producers have decreased to $8 per widget.
The quantity traded has also decreased. This distortion has created the deadweight loss equal to area E+H.
The quantity of deadweight loss is the quantity by which social surplus has decreased.
So, social surplus has decreased by area E+H.
Hence, the correct answer is the option (a).