In a supply and demand diagram illustrating the imposition of a tax, what does the shaded area representing tax revenue indicate?

• A. The deadweight loss created by the tax
• B. The total market value of goods sold before the tax was imposed
• C. The loss in consumer surplus due to the tax
• D. The total amount collected by the government from the tax, calculated as the tax per unit multiplied by the quantity sold after the tax

Answer: (D)

Verified step by step guidance

1. Understand that in a supply and demand diagram with a tax, the tax creates a wedge between the price buyers pay and the price sellers receive.
2. Identify the vertical distance between the supply and demand curves after the tax is imposed; this distance represents the tax per unit.
3. Determine the new equilibrium quantity sold after the tax, which is where the new supply curve (including tax) intersects the demand curve.
4. Calculate the tax revenue as the product of the tax per unit and the quantity sold after the tax, which corresponds to the rectangular shaded area between the supply and demand curves over the quantity sold.
5. Recognize that this shaded area represents the total amount collected by the government from the tax, not the deadweight loss or changes in consumer surplus.