Question

In order to decrease alcohol consumption, Rockingham County institutes a $2 tax on each 12-pack of beer sold. This tax will do each of the following except:

A) increase social surplus because of the increase in tax revenue.

B) decrease producer surplus since producers receive less for each 12-pack sold.

C) establish a $2 wedge between the amount that consumers pay and the amount that producers receive.

D) decrease consumer surplus since consumers pay more for beer now.

Answer 1

The $2 tax on each 12-pack of beer sold in Rockingham County will not increase social surplus because the losses to consumer and producer surplus are not fully compensated by the tax revenue.

Step-by-step explanation:

The imposition of a $2 tax on each 12-pack of beer in Rockingham County is designed to decrease alcohol consumption. This tax will indeed increase social surplus due to the tax revenue (option A), decrease producer surplus as producers get less for each 12-pack (option B), and create a $2 wedge between what consumers pay and producers receive (option C).

However, this tax will not increase social surplus because while tax revenue goes up, consumer and producer surplus usually go down. Therefore, the statement that the tax will increase social surplus (option A) is not correct as the loss to consumers and producers is not typically completely off-set by the gain in tax revenue. Moreover, when a tax is introduced, it typically results in a decrease in consumer surplus because consumers pay more for products (option D).