Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 25 million bottles of wine were sold every month at a price of $7 per bottle. After the tax, 18 million bottles of wine are sold every month; consumers pay $8 per bottle (including the tax), and producers receive $5 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 smaller if the tax had been levied on producers.

Answer 1

Answer:

The correct answer for the first scenario is total tax = $3, tax on consumer = $1 and tax on producer = $2.

For the second scenario, the answer will be False.

Explanation:

According to the scenario, given data is:

Price for consumer before tax = $7

Price for consumer after tax = $8

Price producer gets before tax = $7

Price producer gets after tax = $5

So, the amount of tax = Price consumer pay after tax - Price producer gets after tax.

= $8 - $5  = $3

Burden of tax on consumer = Price after tax for consumer - price before tax for consumer

=  $8 - $7 = $1

Burden of tax on producer = Price producer gets before tax - Price producer gets after tax

= $7 - $5 = $2

For the second scenario, given statement will be false because the result will be same if the tax is levied on producer or consumer.