Suppose that the government decides to charge cola consumers an excise tax. Before the tax, 12 million cases of cola are sold every month at a price of $3.50 per case. After the tax, 6 million cases of cola are sold every month; consumers pay $4.00 per case and producers receive $2.00 per case. Use this information to answer the following questions. (a) What is the incidence of the tax that falls on producers. (b) What is the incidence of the tax that falls on consumers
For a i got $1.50 and for b I got .50 cents
I agree
To calculate the incidence of the tax that falls on producers and consumers, we need to understand how the tax affects the price and quantity in the market for cola.
Before the tax:
- Quantity sold: 12 million cases
- Price: $3.50 per case
After the tax:
- Quantity sold: 6 million cases
- Price: $4.00 per case
To calculate the incidence on producers:
- Producers receive $2.00 per case after the tax.
- Before the tax, they were receiving $3.50 per case.
- The difference of $1.50 per case is the amount of the tax that falls on producers.
To calculate the incidence on consumers:
- Consumers now pay $4.00 per case.
- Before the tax, they were paying $3.50 per case.
- The difference of $0.50 per case is the amount of the tax that falls on consumers.
Therefore, you are correct:
(a) The incidence of the tax that falls on producers is $1.50 per case.
(b) The incidence of the tax that falls on consumers is $0.50 per case.