How does the imposition of a sales tax affect consumer surplus?

• A. It increases consumer surplus by lowering the price paid by consumers.
• B. It eliminates consumer surplus entirely.
• C. It has no effect on consumer surplus because only producers are affected.
• D. It decreases consumer surplus by increasing the price paid by consumers.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents the net benefit to consumers from participating in the market.
2. Step 2: Recognize that a sales tax effectively increases the price that consumers pay for a good. If the original price is \(P\), and the sales tax per unit is \(t\), then the new price paid by consumers becomes \(P + t\).
3. Step 3: Analyze how the increase in price affects consumer surplus. Since consumers now pay a higher price, the area representing consumer surplus on a supply and demand graph shrinks because fewer consumers are willing or able to buy the good at the higher price.
4. Step 4: Note that the reduction in consumer surplus is due to both the higher price and the decrease in quantity demanded. The tax causes a movement along the demand curve to a lower quantity, reducing the total benefit consumers receive.
5. Step 5: Conclude that the imposition of a sales tax decreases consumer surplus by increasing the price paid by consumers, which reduces their net benefit from purchasing the good.