Question

Suppose the government requires beer drinkers to pay a $3 on each case of beer that they purchase. a. Illustrate the market for beer without the tax. Show the price the buyers pay, the price the sellers receive, and the quantity bought and sold without the tax. b. Now illustrate the market for beer with the per-case tax on consumers. Show the price paid by consumers, the price received by sellers, and the quantity bought and sold with the tax. c. Indicate where one can find the amount of producer surplus in the market with a tax. What about consumer surplus

Answer 1

Explanation:

a).In the following graph, $D_0 \text{ and}\ S_0$ are the pre tax demand the supply curve that intersects at the point A with price $P_0$ (the price paid by the buyers = price received by sellers) and the quantity $Q_0$  (quantity bought = quantity sold)

b). The tax on the consumers will decrease the demand of the beer shifting the demand curve leftwards from the $D_0 \text{ and}\ D_1$  intersecting point $S_0$ at point B. Price paid by the buyers is point $P_1$, price received by the producers is $P_2$  and the tax per unit is $(P_1 - P_2)$ , which is equal to the vertical distance BC. Quantity bought and sold is lower at $Q_1$.

c). Producer surplus is the area between supply curve and the price received by the producers, which is equal to the area $P_2BE$. And the consumer surplus may be the area between the price paid by the consumers and the demand curve, and is equal to the area $P_1CD$.