Suppose that the U. S. government decides to charge wine consumers a tax. Before the tax, 25 million bottles of wine were sold every month at a price of $5 per bottle. After the tax, 18 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 per bottle. The amount of the tax on a bottle of wine is $ per bottle. Of this amount, the burden that falls on consumers is $ per bottle, and the burden that falls on producers is $ per bottle. True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers.

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 25 million bottles of wine were sold every month at a price of $5 per bottle.

After the tax, 18 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 per bottle.

The amount of the tax on a bottle of wine is $3 per bottle. Of this amount, the burden that falls on consumers is $1 per bottle, and the burden that falls on producers is $2 per bottle.

True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers.

False

Explanation:

When tax is levied on producers, they normally shift the burden to the consumers unless the product enjoys a large profit margin.  If the producers must receive $3 instead of $5 before the tax, then they will pass the whole tax burden to consumers, thereby increasing price to $6.  This action will still reduce the demand from 25 million to 18 million bottles of wine.

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