Use the figure below to answer the following question.

What area represents producer surplus after the government imposes the excise tax on the market?

Question

Use the figure below to answer the following question.

What area represents producer surplus after the government imposes the excise tax on the market?

BlackTom AI · Accepted Answer

Begin by identifying what producer surplus represents in a standard supply-and-demand diagram: it is the area above the supply (cost) curve and below the price that producers actually receive. When the government imposes an excise tax, the price received by producers falls (the gross price paid by buyers is higher, but producers get less after paying the tax), and the quantity transacted typically decreases. With that in mind, evaluate each option to see which area corresponds to the producer surplus after the tax.

Option 1: triangle FHE
- This region lies above the supply curve and below a price level that is relatively low, but its horizontal extent and vertical boundaries may not align with the post-tax price received by producers and the post-tax quantity. If F, H, and E mark levels that don’t correspond to the actual price producers receive after the tax or the post-tax quantity, this triangle would misrepresent PS. In many tax diagrams, this small triangle does not capture the full surplus producers retain after the tax.

Option 2: triangle GHI
- This choice identifies a triangular region bounded by the post-tax price received by producers, the post-tax quantity, and the supply curve. Since producer surplus is the area under the price producers receive and above the supply curve, triangle GHI is consistent with the expected PS after the tax: it lies between the new, lower price line that producers actually get and the marginal cost curve, across the quantity sold after the tax.

Option 3: triangle AGB
- This triangle would typically involve areas above the initial pre-tax price or outside the post-tax quantity, depending on the diagram’s labeling. If A, G, and B define a region above the post-tax price or spanning the pre-tax transaction level, it would not reflect the reduced producer surplus after the tax. In short, it either overstates PS or misplaces it relative to the post-tax equilibrium.

Option 4: rectangle BGHE
- A rectangle would imply a uniform price difference across multiple units, which is more characteristic of a price wedge that is uniform across a range of quantities. In most excise-tax diagrams, producer surplus becomes a smaller, triangular area rather than a rectangular block, because the opportunity cost increases with quantity and the supply curve is upward sloping. Therefore, BGHE as a rectangle does not faithfully depict the PS under a changing marginal cost scenario after the tax.

In summary, triangle GHI matches the conventional depiction of producer surplus after an excise tax: it is the area between the price received by producers (lower due to the tax), the supply curve (marginal cost), and up to the post-tax quantity traded. The other options either fail to align with the post-tax price/quantity or misrepresent the shape of PS under tax-induced equilibrium changes.

Use the figure below to answer the following question. What area represents producer surplus after the government imposes the excise tax on the market?

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