David walks Carolyn’s dog once a day for $50 per week. Carolyn values this service at $60 per week, while the opportunity cost of David’s time is $30 per week. The government places a tax of $35 per week on dog walkers. Before the tax, what is the total surplus?

The total surplus is $30.

Explanation:

The total surplus before the tax is the sum of the producer surplus, and the consumer surplus.

In this case, the producer is David, who is walking the dog. David is making $50 per week for the task, while his opportunity cost (the value of his time if he did not walk the dog and did something else instead) is $30. As a result, his surplus, the producer surplus, is $20.

Carolyn, the consumer, is paying David $50, but she places a value of $60 on this activity, as a result, her surplus, the consumer surplus, is $10.

The sum of producer surplus ($20), and consumer surplus ($10), is $30.

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