Use a graph to show that, when the government increases the tax on a good, the sum of the change in consumer surplus plus the change in producer surplus plus the change in government revenue equals the change in the deadweight loss. Verify that this relationship holds by comparing the answers to Worked-Out Problem 15.1 and In-Text Exercise 15.1 (pages 522 and 523).
In Exercise 15.1
The market demand function for corn is Qd = 15 - 2P and the mar ket supply function is Qs = 5P -2.5, both measured in billions of bushels per year. Suppose the government imposes a $2.10 tax per bushel. What will be the effects on aggregate surplus, consumer surplus, and producer surplus? What will be the deadweight loss created by the tax?