Assignment 1 Consumer Surplus

Assignment 1 Consumer Surplus

Effects of Imposing Surplus Tax on Production and Consumption

Surplus tax is levied on good or service where consumer surplus is experienced. Consumer surplus refers to the difference between the price final consumers are willing to pay and the market price of such goods and services. In this case, the price charged in the market is lower than what consumers are willing to pay (Varian, 2014). On the other hand, consumer deficit is experienced when the price charged in the marketplace is higher than the consumers are willing to offer (Varian, 2014). The government intervenes by charging a surplus tax in markets experiencing consumer surplus and the revenue collected is channelled to markets experiencing consumer deficit. Introduction of surplus tax has positive and negative impacts on production and consumption.

Surplus tax negatively affects both the production and consumption of goods where it is imposed but the opposite is observed in goods that were experiencing consumer deficit. Taking an example where the market price of white bread is $5 but the consumers are willing to pay $6.5 thereby enjoying a consumer surplus of $1.5 while producers can sell at $4.5 enjoying producer surplus of $0.5.  Similarly, brown bread may be sold at $6 but consumers are willing to offer $4.5 hence experiencing a consumer deficit of $1.5. Imposing surplus tax of $1 on white bread discourages both the consumers of white bread leading to lower demand, which in turn reduces quantity produced by producers (Stiglitz & Rosengard, 2015).

When the tax from surplus tax is allocated to brown bread market, the price reduces encouraging consumers to purchase more. To meet the high demand, producers increase their production.  More brown bread are produced and sold at a favorable price rectifying the consumer deficit originally experienced.

References

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

Assignment 1 Consumer Surplus