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Producer surplus in deadweight loss

N

Neha Maheshwari

Member
In chapter 12 under deadweight loss after taxes from the products . Its given that the producer surplus after tax is h ?

How can it be h with that curve that can't even supply to that point. Shouldn't it be b+e? After all its the cost they can sell but are not so it shoud be between P2 and midway of Pp and P1?
 
The producer surplus here is actually equal to both h and b+e - the two areas should actually be equal on an accurate diagram.

The producer surplus is defined as the excess of total revenue (TR) over that needed to maintain the current supply and this diagram assumes perfect competition, so that the area beneath the supply curve represents total variable cost (TVC) for the industry.

So, here, if you include the tax paid by the producers as part of the TVC of supply , then TR - TVC = P2Q2 - area below S2 = b+ e.

However, if you exclude the tax from the TVC and instead deduct it from the TR received by the firms and so instead consider the total net of tax revenue available to cover the costs of production , then TR - TVC = PpQ2 - area below S1 = h
 
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