Compute how the tax affects the price paid by consumers and the price received by producers
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 Qd = 500,000-20,000P (where Qd is the number of gallons of liquor demanded and P is the price per gallon), and the supply curve for liquor is Qs = 30,000P (where Qs is the number of gallons supplied).
a. Compute how the tax affects the price paid by consumers and the price received by producers. Explain how the incidence is shared.
b. How much revenue does the tax raise for the government? Can you identify how much the deadweight loss is for consumers, and how much from the producers?
c. 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 with reference to your diagram
d. Suppose that each gallon of liquor consumed generates a negative externality on society of $0.50. How would the negative externality affect the simple efficiency consideration that only focused on the DWL associated with the unit tax on liquor?
Accounts & Finance"Pre tax equilibrium when Qd=Qs500,000-20,000p=30,000pp=10Q=300,000after tax equilbrium500,000-20,000p=30,000(p-1)solving we get p=10.6Q=30000*(10.6-1)=288,000Consumers pay $10.5 and producers $9.6 as $1 goes for tax"...