CHAPTER • The Analysis of Competitive Markets 351 Price (dollars per gallon) 3.00 F IGURE 9.20 IMPACT OF $1 GASOLINE TAX The price of gasoline at the pump increases from $2.00 per gallon to $2.44, and the quantity sold falls from 100 to 89 bg/yr Annual revenue from the tax is (1.00)(89) ϭ $89 billion The two triangles show the deadweight loss of $5.5 billion per year Lost Consumer Surplus Pb = 2.44 A P0 = 2.00 t = 1.00 D Lost Producer Surplus Ps = 1.44 1.00 11 0.00 50 89 100 150 Quantity (billion gallons per year) calculate this from Figure 9.20 Combining the two small triangles into one large one, we see that the area is (1/2) * ($1.00/gallon) * (11 billion gallons/year) = $5.5 billion per year This deadweight loss is about percent of the government revenue resulting from the tax, and must be balanced against any additional benefits that the tax might bring SUMMARY Simple models of supply and demand can be used to analyze a wide variety of government policies, including price controls, minimum prices, price support programs, production quotas or incentive programs to limit output, import tariffs and quotas, and taxes and subsidies In each case, consumer and producer surplus are used to evaluate the gains and losses to consumers and producers Applying the methodology to natural gas price controls, airline regulation, price supports for wheat, and the sugar quota shows that these gains and losses can be quite large When government imposes a tax or subsidy, price usually does not rise or fall by the full amount of the tax or subsidy Also, the incidence of a tax or subsidy is usually split between producers and consumers The fraction that each group ends up paying or receiving depends on the relative elasticities of supply and demand Government intervention generally leads to a deadweight loss; even if consumer surplus and producer surplus are weighted equally, there will be a net loss from government policies that shifts surplus from one group to the other In some cases, this deadweight loss