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Taxes and How They Affect Surplus

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What happens to consumer and producer surplus when a good is taxed? Explain using the concept of deadweight loss.

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Solution Summary

Using the concept of deadweight loss, the effect of taxes on consumer and producer surplus is examined. Includes a graph.

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The consumer and producer surpluses are the monetary values that consumers and producers receive from transactions. Consumer surplus occurs when consumers buy goods for less than the highest value than they would be willing to pay. Producer surpluses occur when the prices of goods sold are higher than the lowest price the producer would accept.

The concept of a deadweight loss is used to describe how a free market is affected by some sort of interference. For ...

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