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Social Science Clinic => Economics => Topic started by: ShannenConnor on Nov 23, 2022

Title: The city of Pura has decided to levy a tax on alcoholic beverages. Before the tax 155 alcoholic ...
Post by: ShannenConnor on Nov 23, 2022

The city of Pura has decided to levy a tax on alcoholic beverages. Before the tax 155 alcoholic beverages were consumed and after the tax 124 alcoholic beverages were consumed. The price of alcoholic beverages before the tax was $4.90 and the tax rate is 40.00 percent. If consumers fully bear the burden of the tax, what is the excess burden of the tax as a percentage of tax revenues?
Please round your final answer to two decimal places.
◦ 12.50%
◦ 10.00%
◦ 40.00%
◦ 25.00%

Title: The city of Pura has decided to levy a tax on alcoholic beverages. Before the tax 155 alcoholic ...
Post by: mllong on Nov 23, 2022

12.50%

Before the tax was levied, 155 alcoholic beverages were consumed at a price of $4.90.

The tax on alcohol = Price before tax*Tax rate = 4.90*(40.00/100) = 4.90*0.4 = $1.96.
After the tax was levied, 124 alcoholic beverages were consumed at a price of 4.90 + tax = 4.90 + 1.96 = $6.86.

If consumers fully bear the burden of the tax, then the supply of alcohol is perfectly elastic.
The excess burden of the tax is the deadweight loss due to the tax (the shaded area in the graph).

Deadweight loss = 0.5 * base * height = 0.5*(Qo - Qaftertax)*(Paftertax - Po)
Deadweight loss = 0.5*(155-124)*(6.86-4.90) = $30.38

The government receives revenue from the tax equal to the tax times the quantity sold after the tax.
Government revenue = Tax * Qaftertax = 1.96*124 = $243.04

Therefore, the excess burden of the tax as a percentage of tax revenues = 100*(Deadweight loss/Government revenue) = 100*(30.38/243.04) = 12.50%