Consumer Surplus, Producer Surplus, and Society Welfare Exercises

I. Welfare effects of excise tax imposed on producer

	Before Tax Price = P1 Output = Q1	After Tax tax = AE = FG Price consumers pay =P2 Price firms keep = P3 Output = Q2 consumers’ tax burden = P1P2FH producers’ tax burden = P3P1HG	Change
Consumer Surplus	P1BA	P2BF	-P1P2FA
Producer Surplus	CP1A	CP3G	-P3P1AG
Government	0	P3P2FG	+ P3P2FG
Society Welfare	CBA	CBFG	Deadweight Loss = DWL= -GFA

Area P₁P₂FH: Initially part of consumer surplus; transferred to government

Area P₃P₁HG: Initially part of producer surplus; transferred to government

Area GHA: Initially part of consumer surplus; transferred to no one; part of lost welfare

Area HFA: Initially part of producer surplus; transferred to no one; part of lost welfare

II. Welfare effects of free trade: Small country that takes world price (=P_W) as given

A. The case of an exporter

	Before Trade Domestic price = P1 Domestic Output = Q1	After Trade Domestic price = world price = PW Domestic consumption = Q3 Domestic production = Q2 Exports = FG = Q2-Q3	Change
Consumer Surplus	P1BA	PWBF	-P1PWFA
Producer Surplus	CP1A	CPWG	+P1PWGA
Society Welfare	CBA	CBFG	Gains from Trade= +FGA

B. The case of an importer

	Before Trade Domestic price = P1 Domestic Output = Q1	After Trade Domestic price = world price = PW Domestic consumption = Q2 Domestic production = Q3 Imports = FG = Q2-Q3	Change
Consumer Surplus	P1BA	PWBF	+PWP1AF
Producer Surplus	CP1A	CPWG	-PWP1AG
Society Welfare	CBA	CBFG	Gains from Trade= +GAF

C. The welfare impact of a tariff

	After Trade Before Tariff Domestic price = world price = P1 Domestic consumption = Q1 Domestic production = Q2 Imports = AE = Q1 - Q2	After Trade After Tariff Domestic price = P2 Domestic consumption = Q3 Domestic production = Q4 Imports = FG = Q3 - Q4	Change
Consumer Surplus	P1BA	P2BF	-P1P2FA
Producer Surplus	CP1E	CP2G	+P1P2GE
Government	0	HGFI	+HGFI
Society Welfare	CBAE	CBFIHGE	Deadweight Loss = DWL= -(EGH + IFA)