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 cola consumers a tax. Before the tax, 40,000 cases of cola were sold every week at a price of $7 per case. After the tax, 34,000 cases of cola are sold every week; consumers pay $8 per case (including the tax), and producers receive $4 per case. The amount of the tax on a case of cola 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. True False

Explanation / Answer

1) Amount of tax = Price paid by consumers - Price received by seller = 8 - 4 = $ 4

2) Burden that falls on consumers = Price consumers pay - Market price before tax = 8 - 7 = $ 1

3) Burden on producers = Market price before tax - Price sellers receive = 7 - 4 = $ 3

4) False

Tax on producers decreases quantity by large amount so effect of tax on quantity will be greater.

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