Question

Candida teaches piano lessons to Ed once a week for $40. Ed values this service at $50 per week, while the opportunity cost of Candida's time is $25 per week. The government places a tax of $30 per week on piano teachers. After the tax, what is the total surplus?

Answer 1

After the government imposes a $30 tax on piano lessons, the total surplus is likely to decrease significantly. Ed's consumer surplus before the tax was $10 and Candida's producer surplus was $15. With the tax, Candida's net earnings would equal her opportunity cost, eliminating her producer surplus.

Step-by-step explanation:

The question asks about the calculation of total surplus after the government imposes a tax on piano teachers. Candida charges Ed $40 for piano lessons, while Ed values them at $50 per week, indicating a consumer surplus of $10 ($50 - $40) before the tax.

Candida's opportunity cost is $25, which implies that her producer surplus is $15 ($40 - $25) before the tax. However, after the government imposes a $30 tax on piano teachers, Candida's net earnings would decrease to $10 ($40 - $30). This would likely eliminate her producer surplus, as her earnings would now be equal to her opportunity cost. As taxes typically reduce the overall surplus in a market by creating a deadweight loss, it is clear that the imposition of the tax results in lower surpluses for both the consumer and the producer.