Calculating tax incidence Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 10,000 cases of cola were sold every week at a price of $5 per case. After the tax, 3,000 cases of cola are sold every week; consumers pay $8 per case (including the tax), and producers receive $3 per case. 1) The amount of the tax on a case of cola is $??? per case. 2) Of this amount, the burden that falls on consumers is $??? per case, and the burden that falls on producers is ???$ per case. 3) 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 producers. True/ False

Answer:

1) The amount of the tax on a case of cola is $5 per case.
2) Of this amount, the burden that falls on consumers is $3** per case, and the burden that falls on producers is **$2 per case.
3) True

Explanation:

1) The tax amount is the difference between what consumers pay and what producers receive. Consumers pay $8 per case, and producers receive $3 per case. Therefore, the tax is \( 8 - 3 = 5 \) dollars per case.

2) The burden on consumers is the increase in price they pay due to the tax. Before the tax, consumers paid $5 per case, and after the tax, they pay $8 per case. Thus, the burden on consumers is \( 8 - 5 = 3 \) dollars per case. The burden on producers is the decrease in the price they receive. Before the tax, they received $5 per case, and after the tax, they receive $3 per case. Thus, the burden on producers is \( 5 - 3 = 2 \) dollars per case.

3) The statement is True. The effect of the tax on the quantity sold would have been the same if the tax had been levied on producers instead of consumers. This is because the incidence of the tax depends on the relative elasticities of demand and supply, not on who is formally responsible for paying the tax.

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