Question

Calculating tax incidence

Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 50,000 cases of beer were sold every week at a price of $7 per case. After the tax, 43,000 cases of beer are sold every week; consumers pay $10 per case (including the tax), and producers receive $5 per case.

  The amount of the tax on a case of beer is $_____ per case. Of this amount, the burden that falls on consumers is $______ per case,

and the burden that falls on producers is $ ____ per case.

True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers. _________

Answer 1

Calculate the amount of tax -

Amount of tax = Price paid by consumers after tax - Price received by producers after tax

Amount of tax = $10 - $5 = $5

Thus,

The amount of the tax on a case of beer is $5 per case.

Calculate the burden of tax on consumers -

Burden of tax on consumers = Price paid by consumers after tax - Price paid by consumers before tax

Burden of tax on consumers = $10 - $7 = $3

Calculate the burden of tax on producers -

Burden of tax on producers = Price received by producers before tax - Price recived by producers after tax

Burden of tax on consumers = $7 - $5 = $2

Thus,

Of this amount, the burden that falls on consumers is $3 per case, and the burden that falls on producers is $2 per case.

The effect of the tax on quantity sold remains same whether the tax is levied on the buyers or the sellers.

Thus,

The given statement is False.