Question

Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?a. This tax causes the demand curve for liquor to shift downward by $0.80 at each quantity of liquor.b. The incidence of the tax is summarized by the fact that sellers send the tax payments to the government.c. Eighty percent of the burden of the tax falls on buyers.d. All of the above are correct.

Answer 1

Answer:

All of the above are correct

Explanation:

We evaluate the validity of each of the options.

A) option A is correct

According to the law of demand, all things being equal an increase in price leads to a decrease in the quantity demanded.

If there was no tax, it would have been sold at a lesser price which would have driven the demand curve upwards

B) Option B is correct

The incidence of the tax is summarized by the fact that tax payments are sent to the government.

C) Option C is correct

The total tax is $1 with the buyers paying $0.8 more for a bottle of liquor. This means they bear the burden of paying 80% of the tax

D) Is correct.

Having evaluated the validity of all the options to be correct, then this particular option is correct too

Answer 2

Answer:

A) This tax causes the demand curve for liquor to shift downward by $0.80 at each quantity of liquor.

Explanation:

It doesn't matter if a supplier is taxed directly (like this case) or if the consumer is taxed directly (sales taxes), taxes will negatively affect both suppliers and consumers. This happens because taxes always increase the price of the goods and decrease the amount that suppliers receive for selling the goods.

In this case, consumers will pay $0.80 more per bottle and suppliers will receive $0.20 less per bottle sold. But that doesn't mean that 80% of the tax burden affects consumers only, since the demand curve will shift to the left, reducing the quantity demanded at every price level. Taxes affect both consumers and suppliers at the same rate simply because suppliers will sell less, so their total revenue wouldn't decrease by just $0.20 per bottle, it will decrease much more depending on the price elasticity of liquor. Suppliers and consumers share the tax burden equally, no one benefits, not even the government in the long run (but that is another story)