Calculating tax incidence
Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 40 billion bottles of wine were sold every year at a price of $5 per bottle. After the tax, 34 billion bottles of wine are sold every year; consumers pay $6 per bottle, and producers receive $2 per bottle (after paying the tax).
The amount of the tax on a bottle of wine isper bottle. Of this amount, the burden that falls on consumers isper bottle, and the burden that falls on producers isper bottle.
True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers.
True
False