Question

5. Calculating tax incidence 

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 30 billion bottles of wine were sold every year at a price of $6 per bottle. After the tax, 23 billion bottles of wine are sold every year; consumers pay $9 per bottle (including the tax), and producers receive 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 larger if the tax had been levied on producers 

• True 

• False

Answer 1

Ans) When government imposes tax, it does not really matter upon whom tax is levied, burden is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity. Consequently, less elastic side of the market bears greater burden of tax.

Further, tax= price paid by buyers after tax - price received by sellers after tax

Tax burden on buyers = price paid by buyers after tax - equilibrium price

Tax burden on buyers = equilibrium price - price received by sellers after tax.

Here, equilibrium price = $6

Price paid by buyers after tax = $9

Price received by sellers after tax = $4

So, tax = $9 - $4 = $5

Tax burden on buyers = $9 - $6 = $3

Tax burden on sellers = $6 - $4 = $2

Here you can notice that more tax burden is falling upon buyers. Therefore, demand is less elastic than supply.