Answer
a) Please see the graph.
b) Consumers and producers are made worse off, while the government gets tax revenue (and there is a deadweight loss).
c) Yes, all parties could be better off than they were with a tax.
Work Step by Step
a) The equilibrium quantity and price are noted as $Q_{0}$ and $P_{0}$, respectively on the graph. The consumer surplus and producer surplus are noted as $A+B+C$ and $D+E+F$, respectively on the graph. There is no deadweight loss as there is no current tax on the good.
b) With the tax on pizza, the new price consumers pay is $P_{C}$, while producers receive $P_{S}$. The new quantity consumed is $Q_{T}$.
Consumer surplus decreases from $A+B+C$ to $A$. Producer surplus decreases from $D+E+F$ to $F$. The tax revenue is $B+D$, which is the quantity consumed multiplied by the amount of the tax. Deadweight loss is $A+B+C+D+E+F-(A+B+D+F)$, or $C+E$.
c) If the tax were removed, consumer surplus reverts to $A+B+C$, and producer surplus reverts to $D+E+F$. With the tax, consumer surplus is $A$, so if the consumers gave up a little more than $B$, the consumer surplus would be slightly less than $A+C$ (since consumers gave up slightly more than $B$).
With the tax, producer surplus is $F$, so if the consumers gave up a little more than $D$, the producer surplus would be slightly less than $E+F$ (since consumers gave up slightly more than $D$). Thus, all three parties are made better off if consumers and producers both voluntarily transfer some of their gains to the government.
