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 $5 per bottle. After the tax, 18 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 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:

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 $5 per bottle.

After the tax, 18 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 per bottle.

The amount of the tax on a bottle of wine is $3 per bottle. Of this amount, the burden that falls on consumers is $1 per bottle, and the burden that falls on producers is $2 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.

False

Explanation:

When tax is levied on producers, they normally shift the burden to the consumers unless the product enjoys a large profit margin.  If the producers must receive $3 instead of $5 before the tax, then they will pass the whole tax burden to consumers, thereby increasing price to $6.  This action will still reduce the demand from 25 million to 18 million bottles of wine.