Question

6. Calculating tax incidence Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 15 million cases of cola were sold every month at a price of $6 per case. After the tax, 9 million cases of cola are sold every month; consumers pay $9 per case (including the tax), and producers receive $3 per case The amount of the tax on a case of colas S p er case of this amount, the burden that falls on consumers is S burden that falls on producers is S p er case. p er case, and the True or False: The effect of the tax on the quantity sold would have been larger if the tax had been levied on producers. OTrue O False

Answer 1

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

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 sellers = equilibrium price - price received by sellers after tax.

Here, equilibrium price is $6

So, tax burden on buyers = $9 - $6 = $3

Tax burden on sellers = $6 - $3 = $3

Tax = $9 - $3 = $6

6. Calculating tax incidence Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 15 million cases of cola were sold every month at a price of $6 per case. After the tax, 9 million cases of cola are sold every month; consumers pay $9 per case (including the tax), and producers receive $3 per case The amount of the tax on a case of cola iso per case of this amount, the burden that falls on consumers is 5 burden that falls on producers is 3 per case, per case, and the True or False: The effect of the tax on the quantity sold would have been larger if the tax had been levied on producers. OTrue False