Suppose that the U. S. government decides to charge wine consumers a tax. Before the tax, 10 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 3 billion bottles of wine are sold every year; consumers pay $5 per bottle (including the tax), and producers receive $2 per bottle. 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.

(a) $3 per bottle

(b) $1

(c) $2

Explanation:

Given that,

Before the tax:

10 billion bottles of wine were sold every year at a price of $4 per bottle.

After the tax:

3 billion bottles of wine are sold every year. For which, consumers pay $5 per bottle (including the tax) and producers receive $2 per bottle.

Amount of the tax on a bottle of wine:

= price after tax paid by consumer - price after tax received by producer

= $5 - $2

= $3 per bottle

Burden that falls on consumers:

= Paid after tax - Paid before tax

= $5 - $4

= $1

Burden that falls on producers:

= Received before tax - Received after tax

= $4 - $2

= $2

The amount of tax per bottle of wine = Rs 3 ; Tax burden on consumers = Re 1 ; Tax burden on producers = Rs 2

Explanation:

The per unit tax illustrated in the question is a case of Indirect Tax. Indirect Tax is a tax whose incidence & impact lie on different people & the burden can be shared between buyers & sellers.

When an indirect tax is applied : the burden is either borne by producers,  or is borne by consumers in form of price rise. As after tax, price rise by : Rs 5 - Rs 4 = Re 1 depict tax burden share on consumers. Also after tax, reduction in sale receipt fall by  : Rs 4 -Rs 2 = Rs 2 depict the tax burden on producers.

So: Total Tax Burden = Rs 3 ; as summation of tax burden borne by producers & consumers = Rs 2 & Re 1 respectively.

answer; the correct answer to the above statement is (true);