Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 10 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 4 billion bottles of wine are sold every year; consumers pay $7 per bottle (including the tax), and producers receive $1 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
I got $6 in tax. $3 on consumer and $1 on producers. But I don't think this is right. Please help!
1 answer
Something is missing from the question. It does not tell us what producers received before the tax was levied. For the second, true-false, question, one must assume that the cost of the tax will ultimately be paid by the consumer. The producer will raise prices to recoup the tax if it is levied on the producer, so the net effect on sales would be the same. If the producer decided to assume some of the cost of the tax itself and not raise prices to match the tax, the effect on sales might be mitigated. We don't know that from the question.