Question

5. Calculating tax incidence 

 Suppose that the U.S. government decides to charge beer producers a tax. Before the tax, 10 billion cases of beer were sold every year at a price of $6 per case. After the tax, 5 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 larger if the tax had been levied on consumers.

 True

 False

Answer 1

1. Tax on a per case of beer is $3. ( $2 paid by consumer + $1 paid by producer)

2. The tax amount paid by a consumer is $2. (New price - old price = $8 - $6)

3. The tax amount paid by a producer is $1. (Old price receive - New price receive = $6 - $5)

True because a consumer will decrease his consumption in a large quantity until the demand for a good is inelastic.