Question

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 10 million bottles of wine were sold every month at a price of $4 per bottle. After the tax, 3 million bottles of wine are sold every month; consumers pay $7 per bottle, and producers receive $2 per bottle (after paying the tax).

The amount of the tax on a bottle of wine is -----per bottle. Of this amount, the burden that falls on consumers is-------per bottle, and the burden that falls on producers is------per bottle.
True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers.
a) True
b) False

Answer 1

The amount of the tax on a bottle of wine is $5 per bottle. Of this amount, the burden that falls on consumers is $3 per bottle, and the burden that falls on producers is $2 per bottle.

• tax per bottle = $7 - $2 = $5
• consumers pay an extra $7 - $4 = $3 per bottle
• producers pay $7 - $5 = $2 per bottle

True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers.

b) False

The negative effect is the same regardless of who pays for it. Taxes create deadweight losses that affect both producers and consumers.