Question

Figure 1.5 Price is per pack) ACTIVITIES $2.50 Tax t 1.50 1.25 COURSE TOC Demand 18 20 Quantity billions of packs per year) zoom 1 Refer to figure 1-5. The figure above represents demand and supply in the market for cigarettes. Use the diagram to answer the following questions How much is the government tax on each pack of cigarettes? b What portion of the unit tax is paid by consumers? PEOPLE What portion of the unit tax is paid by producers? What is the quantity sold after the imposition of the taxe What is the after tax revenue per pack received by produce CALENDAR f what is the total tax revenue collected by the government What is the value of the excess burden of the

Answer 1

Question 1

(a)

The imposition of tax has shifted the supply curve upward from S₁ to S₂.

The vertical distance between supply curve S₁ and S₂ is the tax.

The vertical distance is $1.25

So,

The government tax on each pack of cigarettes is $1.25

(b)

Before tax, consumers were paying $1.50 per pack.

After tax, consumers were paying $2.50 per pack.

Burden of tax on consumers = $2.50 - $1.50 = $1.00

So,

The portion of the unit tax paid by consumers is $1.00

(c)

Before tax, producers were receiving $1.50 per pack.

After tax, producers were receiving $1.25 per pack.

Burden of tax on producers = $1.50 - $1.25 = $0.25

So,

The portion of the unit tax paid by producers is $0.25

(d)

The new supply curve, S₂, intersects demand curve corresponding to output of 18 billion packs per year.

So,

The quantity sold after the imposition of the tax is 18 billion packs per year.

(e)

The after tax price received by sellers is $1.25 per pack.

So,

The after tax revenue per pack received by producer is $1.25 per pack.

(f)

Calculate the total tax revenue -

Total tax revenue = Per unit tax * After-tax quantity sold

Total tax revenue = $1.25 * 18 billion = $22.5 billion

Thus,

The total tax revenue collected by the government is $22.5 billion.

(g)

Calculate the value of the excess burden of the tax -

Excess burden = 1/2 * [Quantity sold before tax - Quantity sold after tax] * Per unit tax

Excess burden = 1/2 * [20 billion - 18 billion] * $1.25 = $1.25 billion

Thus,

The value of the excess burden of the tax is $1.25 billion.