Question

Suppose a local government votes to impose an excise tax of $0.90 per bottle on the sales of bottled water. Before the tax the equilibrium price and quantity are $1.10 and 2100 bottles per day. After the tax is imposed, market equilibrium adjusts to a price of $1.70 and quantity of 1500 bottles per day. a. How much revenue from the tax does the local government collect each day? After imposition of the tax, what is the after-tax price received by the sellers?

Answer 1

The local government collects $1350 in tax revenue each day and the after-tax price received by the sellers is $0.20.

Step-by-step explanation:

The tax revenue is given by the shaded area, which is obtained by multiplying the tax per unit by the total quantity sold Qt. The tax incidence on the consumers is given by the difference between the price paid Pc and the initial equilibrium price Pe. The tax incidence on the sellers is given by the difference between the initial equilibrium price Pe and the price they receive after the tax is introduced Pp.

In this case, the tax per bottle is $0.90, and the quantity sold after the tax is 1500 bottles per day. Therefore, the tax revenue collected each day is $0.90 x 1500 = $1350.

The after-tax price received by the sellers is the initial equilibrium price minus the tax per bottle, which is $1.10 - $0.90 = $0.20.