In an effort to reduce alcohol consumption, the government is considering a $1 t

Question

In an effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon of liquor sold (the tax is levied on producers). Suppose that the demand curve is Q^D = 500, 000 - 20, 000P (where Q^Ds the number of gallons of liquor demanded and P is the price per gallon), and the supply curve for liquor is Q^s = 30, 000P (where Q^s is the number of gallons supplied). Compute how the tax affects the price paid by consumers and the price received by producers. How mu Ch revenue does the tax raise for the government? How mu Ch of the revenue comes from consumers, and how mu Ch from producers? Suppose that the demand for liquor is more elastic for younger drinkers than for older drinkers. Will the liquor tax be more, less, or equally effective at reducing liquor consumption among young drinkers? Explain

Explanation / Answer

Pre tax equilibrium when Qd=Qs
500,000-20,000p=30,000p
p=10
Q=300,000

after tax equilbrium
500,000-20,000p=30,000(p-1)
solving we get p=10.6
Q=30000*(10.6-1)=288,000

Consumers pay $10.5 and producers $9.6 as $1 goes for tax

b)Revenue raised=tax*q
=1*288,000=$288,000
consumers bear 60% of burden and producers bear 40% so (0.6*288,000=$172,800) comes form consumers and $115,200 from producers

c)As a more elastic demand curve, quantity consumed will decrease even more as a result of the tax, so it is more effective at reducing consumption among young drinkers

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