Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 45 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 38 billion bottles of wine are sold every year; consumers pay $5 per bottle (including the tax), and producers receive $2 per bottle. 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 the same as if the tax has been levied on producers. True False

Answer 1

The amount of the tax on a bottle of wine is $3 per bottle;

Amount of tax = Amount paid by consumers - Amount received by producers

= 5 - 2

=$3

Of this amount, the burden that falls on consumers is $1 per bottle;

Burden on consumer = Price paid by Consumer after tax - Price paid before

= 5 - 4

= $1

The burden that falls on producers is $2 per bottle;

Burden on producers = Tax - Consumer burden

= 3 - 1

= $2

The effect of the tax on the quantity sold would have been the same as if the tax has been levied on producers. FALSE

If the tax had been on producers then the price might not have increased as it did. This would leave the price at or close to the point it was at and consumers would still be able to afford more of the bottles.