Question

7. Effect of a tax on buyers and sellers Suppose the calculator illustrates the market for wine in the United States. The orange (upward-sloping) line represents the supply curve of wine, and the blue (downward-sloping) line represents the market demand. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. The market is initially in equilibrium. Then the government institutes a $11.60 per bottle tax to be paid by the seller. Hint: To see the impact of the tax, enter the value of the tax in the "Tax on Sellers" field and move the green line to the after-tax equilibrium by adjusting the value in the "Quantity" field. Then, enter zero in the "Tax on Sellers" field. You should see a tax wedge between the price buyers pay and the price sellers receive. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

Answer 1

Before tax, equilibrium price is $50, equilibrium quantity is 50 bottles of wine. Price that buyers pay and price that sellers receive both are equal to $50. After the tax is imposed of 11.60, the price that buyers pay increases to $60 and price that sellers receive falls to $48.40. The quantity is reduced to 46 bottles. A tax of $11.6 is shared by buyers where buyers bear a burden of $10 and sellers bear a burden of $1.60. This shows that the tax burden falls more heavily on the less elastic side of the market (buyers in this case). You can tell that demand is less elastic than supply at these prices.

Quantity (Bottles of wine) 50 46 Price Buyers Pay (Dollars per bottle) 50 60 Price Sellers Receive (Dollars per bottle) 50 48.40 Before Tax After Tax Tax Burden (Dollars per bottle) 10.00 1.60 Buyers Sellers