When a product is taxed,
A) part of the initial consumer surplus goes to the government as revenue.
B) part of the initial consumer surplus becomes a deadweight loss.
C) the producer surplus never changes because consumers pay taxes, not producers.
D) Both answers A and B are correct.
E) Both answers B and C are correct.

Question

Quizplus · Accepted Answer

When a product is taxed, part of the initial consumer surplus goes to the government as revenue (Answer A) and part of the initial consumer surplus becomes a deadweight loss (Answer B). The producer surplus may also change, but it depends on the elasticity of demand and supply. In this case, consumers might pay a higher price as a result of the tax, but producers may have to lower their price to sell the same quantity of the product. Therefore, both answers A and B are correct.

When a Product Is Taxed