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7. Effect of a tax on buyers and sellers

The following graph shows the daily market for wine. Suppose the government institutes a tax of $23.20 per bottle. This places a wedge between the price buyers pay and the price sellers receive.

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

               Quantity(bottles of wine)        Price buyers pay(Dollars per bottle)          Price sellers receive(Dollars per bottle)

Before tax            

After tax 

Using the data entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. enter your results in the following table.

               Tax burden(Dollars per bottle)         Elasticity

Buyers

Sellers

The burden of the tax falls more heavily on the ..........elastic side of the market.

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Sonal Bahl
Sonal BahlLv10
11 Jan 2021

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Related questions

5. Calculating tax incidence

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 20,000 bottles of wine were sold every week at a price of $4 per bottle. After the tax, 13,000 bottles of wine are sold every week; consumers pay $5 per bottle, and producers receive $2 per bottle (after paying the tax).

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 the same as if the tax had been levied on consumers.

Consider the following market QD= 15-2P QS= 5P-2.5

a. Let the government impose a tax of 1.4 dollars per unit on the seller. Find the new equilibrium price paid by buyers PB and the effective price received by sellers PS.

b. Determine the quantity of the goods bought and sold.

c. Calculate the surpluses and the deadweight loss.

d. Calculate the tax revenue.

Suppose the market for widgets can be described by the following equations:

Demand: P = 14 1.00Q
Supply: P = 1.00Q + 6,

Where P is the price in dollars per unit and Q is the quantity in thousands of units. What are the equilibrium price and quantity? The equilibrium quantity is ______ units and the equilibrium price is $______.

Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will be the new equilibrium quantity? What price will the buyer pay? What amount will the seller receive?

The new equilibrium quantity will be __________.
The price paid by buyers will be $__________.
The amount kept by sellers will be $__________.

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