Lesson Overview: Taxation and Deadweight Loss (article) | Khan Academy (2024)

We can break down how the tax revenue was reallocated by breaking the areas of $CS$‍, $PS$‍, and tax revenue as shown in Figure $2$‍ below:

Before the tax was imposed, consumer surplus is comprised of triangle $A$‍, rectangle $B$‍, and triangle $C$‍. After the tax is imposed, only triangle $A$‍ remains part of consumer surplus.

So, what happened to $B$‍ and $C$‍? The area represented by rectangle $B$‍ is the consumer's tax burden. This is the amount of the tax that used to be part of consumer surplus but is now part of the tax revenue. The area represented by $C$‍ is part of the deadweight loss. The buyers of the $4^{th}$‍ and $5^{th}$‍ hamburger are not willing or able to pay $\mathrm{\$}8$‍ for a hamburger, so they no longer participate in this market. As a result, we lose their value in participating in this market.

From the seller's point of view, producer surplus before the tax was comprised of rectangle $D$‍, triangle $E$‍, and triangle $F$‍. After the tax, only triangle $F$‍ remains part of producer surplus.

So, what happened to $D$‍ and $E$‍? The area represented by rectangle $D$‍ is the producer's tax burden. This is the amount of the tax that used to be part of producer surplus but is now part of the tax revenue. The area represented by $E$‍ is part of the deadweight loss. The sellers of the $4^{th}$‍ and $5^{th}$‍ hamburger are not willing or able to produce them for less than $\mathrm{\$}6$‍, so they no longer participate in this market. As a result, we lose their value in participating in this market.