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“Consumer surplus” represents the difference between what a consumer is willing to pay for a good or service and the price that they actually pay. In other words, the concept of consumer surplus indicates how much consumers gain from consuming goods and services at a specified price.

Now let’s consider the case of a “consumer deficit” or the loss represented by consumers who exist at the opposite end of the demand curve. These are those persons who cannot afford to consume any goods or services at the specified price.

To address such a consumer loss, imagine that you are now tasked with imposing a “surplus tax” on consumers through the addition of an individual sales tax which will be added to the market price of certain goods and services. The proceeds from such a tax will be used to compensate an equal number of those consumers at the bottom of the demand curve, thereby, giving them the opportunity to consume such goods and services which they otherwise would not have been able to purchase at the specified price.

 

 

What would be the various consequences of this tax on both consumption as well as production?

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