Question

5. Calculating tax incidence

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 15,000 bottles of wine were sold every week at a price of $7 per bottle. After the tax, 10,000 bottles of wine are sold every week; consumers pay $9 per bottle, and producers receive $6 per bottle (after paying the tax). The amount of the tax on a bottle of wine is $ ? per bottle. Of this amount, the burden that falls on consumers is $ ? per bottle and the burden that falls on producers is $ ? per bottle.

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

Answer 1

Equilibrium price = 7 and equilibrium quantity = 15000

After tax Price = 9 and quantity = 10000

1. The amount of tax on a bottle of wine is 3 ( consumer pay 9 – producer receives 6)

2. The burden of tax on buyer is 2$ per bottle (consumer pay 9 – equilibrium price 7)

3. The burden of tax that falls on producer is 1$ per bottle (equilibrium price 7 – producer receives 6)

4. The statement is False. If whole tax is levied on consumers than the deadweight loss will be larger.