Question

Suppose that the U.S. government decides to charge beer producers a tax. Before the tax, 25 billion cases of beer were sold every year at a price of $7 per case. After the tax, 18 billion cases of beer are sold every year; consumers pay $8 per case, and producers receive $5 per case (after paying the tax). The amount of the tax on a case of beer is $ per case. Of this amount, the burden that falls on consumers is $ per case, and the burden that falls on producers is $ per case. True or False: The effect of the tax on the quantity sold would have been the same as if the tax had been levied on consumers. True False

Answer 1

Answer:

Tax carried forward to consumer $2

Effective tax on the producers    $ 1

TRUE

As the nominal tax is always subject to elasticity in demand and supply which generates an effective tax burden on each party.

Explanation:

Before-tax:

Quantity 25

Price $7

After-tax:

Quantity 18

Price $8

The producer receives $5 (thus there has been a tax of $3)

The tax-burden (who actually pay the tax)

is based on the elasticity of the demand and supply of the market.

When demand is more inelastic the tax burden goes into the consumer more than producers.

When supply is more inelastic the tax burden goes into the producer more than consumers.