5. Calculating tax incidence Suppose that the U.S. government decides to charge

Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 25 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 19 billion bottles of wine are sold every year; consumers pay $5 per bottle (including the tax), and producers receive $1 per bottle. The amount of the tax on a bottle of wine is $ falls on consumers is$ bottle per bottle. Of this amount, the burden that per bottle, and the burden that falls on producers is$ per True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers True False

Explanation / Answer

Tax= price paid by consumers - price received by sellers

Tax= 5-1= 4

Amount of tax is 4 per bottle.

Burden that falls on consumers= price paid after tax - price paid before tax= 5-4= 1

Burden that falls on producers= price received before tax - price received after tax

= 4-1= 3

False- it does not matter on whom the tax is levied, the burden is borne by both producers and consumers depending on their elasticity.

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