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Tax Incidence Explained with Supply and Demand

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6 Tax A tax on a good increases the cost of production, so the supply curve shifts left (upward). At the new equilibrium, the price buyers pay rises, and the quantity demanded falls. Consumer surplus (CS) is the difference between what consumers are willing to pay for a good and what they actually pay. When price rises and quantity falls, consumers lose part of this benefit. Producer surplus (PS) is the difference between what producers receive for a good and their minimum willingness to accept.

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