Suppose the government levies an excise tax on buyers of large-carat diamond rin

Question

Suppose the government levies an excise tax on buyers of large-carat diamond rings. Before the tax, 8,000 rings were sold per year at an average price of $50,000. With the tax in effect, 4,000 rings are sold, buyers pay on average $52,000 per ring and sellers receive $36,000 per ring.

1)Question 23 options:

In the scenario above, what is the amount of the tax per ring?

2)In the scenario above, what percentage of the tax is paid by buyers?

3)In the scenario above, assuming that there are no externalities associated with diamond rings, what is the deadweight loss caused by the tax?

Explanation / Answer

1)

Amount of tax per ring = 52000 - 36000 = $16000

2)

Tax paid by buyers = 100 x (52000 - 50000)/16000 = 12.5%

3)

DWL = (Price paid by buyers - Price received by sellers) x (Quantity before tax - Quantity after tax)/2

DWL = 16000 x (8000 - 4000)/2 = $32000000

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