An excise tax raises the price paid by consumers, and reduces the revenue per unit received by suppliers.

    On the graph to the right we show the effect of the imposition of an excise tax of $4 per unit on surplus. After the tax, Consumers' Surplus is that area under the demand curve above the higher $6.00 price. Producers' Surplus is the area above the supply curve below the new lower producers' price of $2.00.

    As a result of the tax, Consumers' Surplus is reduced by $75, while Producers' Surplus is reduced by$125 due to the tax. Total surplus lost due to the tax is $200. What happens to this surplus?

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