Question

5. Calculating tax incidence 

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 35 million bottles of wine were sold every month at a price of $4 per bottle. After the tax, 30 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 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 larger if the tax had been levied on producers. 

 True 

 False 

Answer 1

1) Tax amount on wine = Consumer paying price - Producer receiving price

Tax amount = 6-3 = $3

Burden Falling on consumer = Amount paid after taxation - Amount at which product is sold before taxation

Burden on consumer = 6-4 = 2$

Burden on producer = Amount at which bottle sold before taxation - Amount producer receive after taxation

Burden on producer = 4-3 = $1

2)True , if the burden is beared by the producer than the consumer will have demanded more and the quantity sold will also increases.