Question

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 30,000 bottles of wine were sold every week at a price of $6 per bottle. After the tax, 25,000 bottles of wine are sold every week; consumers pay $8 per bottle, and producers receive $5 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. True False

Answer 1

The amount of tax is:

= Price paid by consumers - Price received by producers

= 8 - 5

= $3

Burden on consumers:

= Price after tax - Price before tax

= 8 - 6

= $2

Burden on Producers:

= Amount received before tax - Amount received after tax

= 6 - 5

= $1

The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers. ⇒ FALSE.

Tax effects are the same regardless of if levied on consumers directly or on producers.