Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 35 billion bottles of wine were sold every year at a price of $7 per bottle. After the tax, 29 billion bottles of wine are sold every year; consumers pay $8 per bottle (including the tax), and producers receive $4 per bottle. The amount of the tax on a bottle of wine is $1 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:

1. The amount of tax on a bottle of wine is $4.

2. The tax burden on consumers is $1.

3. The tax burden on producers is $3.

4. The effect on the tax on the quantity sold would have been smaller if the tax had been levied on producers.

False.

Explanation:

a) Data and Calculations:

Before the tax, the number of bottles of wine sold every year at $7 per bottle = 35 billion bottles

After the tax, the number of bottles of wine sold every year at $8 per bottle = 29 billion bottles

Therefore, there is a reduction of 6 billion bottles as a result of the increased price of $1 per bottle (from $7 to $8).

The price received by producers = $4 per bottle

Therefore, there is a total tax of $4 ($8 - $4)

Consumers bear $1 ($8 - $7)

Producers bear $3 ($7 - $4)

The effect of the tax would have still increased the price to $8 or more.  Thus, if the tax had been levied on producers, the quantity of bottles sold would have reduced drastically.