Question

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

The amount of the tax on a case of beer is $_____per case. Of this amount, the burden that falls on consumers is $______per case, and the burden that falls on producers is per case.

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

__True

__False

Answer 1

After the tax, since consumers paid $7 per case, and the producers received $2 per case, the difference of $5 (=$7 - $2) is, therefore, the tax amount. Also, before tax, equilibrium price was of $4. It means consumers paid $4, and the producers received $4. After tax, consumers paid $7, therefore, the burden of $3 (=$7 - $4) fell on the consumers. Similarly, producers received $2 after tax. Thus, the burden of $2 ($4 - $2) fell on producers. The amount of the tax on a case of beer is $5 per case. Of this amount, the burden that falls on consumers is $3 per case, and the burden that falls on producers is $2 per case. If tax is imposed on the producers, then the supply curve shifts. If it is imposed on the consumers, the demand curve shifts. In both the cases, the effect on quantity sold remains the same, no matter on whom the tax is imposed. Therefore, the given statement is true.