Question

14.00 8.00 7.50 6.00 4.00 Above is a graph for widgets. The equilibrium price is $8.00 and 25 units are demanded an supplied. The government imposes a tax of $2.00 per widget sold on producers. Use this information to answer the following questions. 6. What is the price consumers pay after the tax? 7. What is the price producers receive after the tax? 8. What is the tax incidence on consumers? 9. What is the tax incidence on producers? 10. How much revenue does the government receive from imposing the tax?

Answer 1

6. After the imposition of tax on producers, the supply curve of producers shift leftwards, from s to s'. The price paid by consumers is where the new supply, s' and demand curve intersects, that is, at price 9.5. Thus, price paid by consumers is 9.5 and quantity traded in market is 20(quantity demanded=quantity supplied =20).

7. The price received by producers after tax is equal to price paid by consumers minus tax. That is, 9.5-2 = 7.5.

8. The tax incidence is the burden of tax borne. The tax incidence on consumers is the increase in price paid by them due to tax( new price, 9.5-old price, 8 = 1.5) multiplied by quantity consumed after after.

Thus, incidence of consumers = 1.5*20= 30

9. Incidence of tax borne by producers is the reduction in price received by them(8-7.5=0.5)* quantity traded after tax.

Tax incidence of producers= 0.5*20= 10.

10. Tax revenue for government = Tax per widget *Quantity traded after tax = 2*20= 40.

Alternatively, the sum of incidence of tax borne by consumers and producers is the tax revenue for government.