In an effort to reduce alcohol consumption, the government is considering a ($ 1) tax on each
Question:
In an effort to reduce alcohol consumption, the government is considering a \(\$ 1\) tax on each galIon of liquor sold (the tax is levied on producers). Suppose that the supply curve for liquor is upward sloping and its equation is \(Q=30,000 P\) (where \(Q\) is the number of gallons of liquor and \(P\) is the price per gallon). The dernand curve for liquor is \(Q=500,000-20,000 P\).
a. Draw a sketch to illustrate the excess burden of the tax. Next use algebra to calculate the excess burden. Show graphically the excess burden generated by the \(\$ 1\) unit tax. (Hint: Compare the losses of both consumer and producer surplus to tax revenues.)
b. Suppose that each gallon of liquor consumed generates a negative external cost of \(\$ 0.50\). How does this affect the excess burden associated with the unit tax on liquor?
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