Assume the government imposes a $0.75 excise tax on the sale of every 2 liter bo

Question

Assume the government imposes a $0.75 excise tax on the sale of every 2 liter bottle of soda. The tax is to be paid by the producers of soda. The figure below shows the annual market for 2 liter bottles of soda before and after the tax is imposed.

Instructions: Round your answers for price to two decimal places. Enter your answers for quantity as a whole number.

b. After the excise tax is imposed, consumers pay a price of $  per bottle.

c. After the excise tax is imposed, the price (or amount) producers keep after the tax is paid is $  per bottle.

d. After the tax is imposed, the equilibrium quantity is  billion bottles.

e. The government is able to collect $  billion of tax revenue from the tax.

Explanation / Answer

b. After the excise tax is imposed, consumers pay a price of $2 per bottle as can be seen from the graph. The intersection of the demand curve and the new supply curve S1 gives the equilibrium price which is paid by the consumers.

c. The price producers keep after the tax is paid is $1.25. The total price including the tax given by the consumers is $2 and the tax which producers need to pay is $.75 so the producers keep $2-$.75= $1.25 per bottle.

d. As from the graph it can seen that after the tax is imposed equilibrium quantity is 3 billion bottles. This is achieved by the intersection of the demand curve and the new supply curve S1 which gives the equilibrium quantity.

e. The per unit tax is $0.75 and the equilibrium quantity is 3 billion bottles. So the government is able to collect $0.75×3 = $2.25 billion of tax revenue from the tax.

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