Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 30 billion cases of beer were sold every year at a price of $5 per case. After the tax, 25 billion cases of beer are sold every year; consumers pay $7 per case (including the tax), and producers receive $4 per case.

Answer 1

The amount of the tax on a case of beer is $3 per case.

Of this amount, the burden that falls on consumers is $2 per case,

and the burden that falls on producers is $ per case.

Step-by-step explanation:

First, we need to calculate the total amount of tax on one case

Amount of tax = Price by the consumer including tax - Producer receives

Where

Price by the consumer including tax = $7

Producer receives = $4

Placing values in the formula

Amount of tax = $7 - $4

Amount of tax = $3

Burden on consumer = Price paid by consumer before tax - Price paid by consumer after tax = $7 - $5 = $2

Burden on Producer = Total tax - Burden on consumer = $3 - $2 = $1