Question

2.Calculating tax incidence

Suppose that the U.S. government decides to charge beer producers a tax. Before the tax, 30 million cases of beer were sold every month at a price of $6 per case. After the tax, 24 million cases of beer are sold every month; consumers pay $7 per case, and producers receive $3 per case (after paying the tax).

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 larger if the tax had been levied on consumers. True False

Answer 1

Answer:

Amount of tax = $4 (= Price paid by buyers - Price received by sellers = $7 - $3)

Burden on consumers = Price paid by buyers after tax - Equilibrium price before tax = $7 - $6 = $1

Burden on producers = Equilibrium price before tax - price received by sellers after tax = $6 - $3 = $3

Thus the amount of the tax on a case of beer is $4 per case. Of this amount, the burden that falls on consumers is $1 per case, and the burden that falls on producers is $3 per case.

The effect of the tax on the quantity sold would have been larger if the tax had been levied on consumers.

- False