Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 25 billion bottles of wine were sold every year at a price of $7 per bottle. After the tax, 18 billion bottles of wine are sold every year; 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 $3 per bottle. Of this amount, the burden that falls on consumers is $1 per bottle, and the burden that falls on producers is $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.

Answer 1

The given statement is False. When a tax is imposed on a market, both buyers and sellers bears the tax burden but tax burden falls more heavily on the inelastic portion of the market. No matter on which side the tax is imposed, after tax equilibrium result will be the same. That is, Consumers would have to pay $8 per bottle and sellers would have received $5 per bottle and after tax equilibrium quantity would be 18 billions bottles, even if the tax was imposed on Consumers.