In the past, some counties (Cook County, IL) and countries (Denmark) have imposed taxes on sugar, saturated fats, and food made with those ingredients as a way to reduce consumption of those foods. Assume the government imposes a unit tax on all chocolate.

a. Is there an externality from consuming chocolate? Explain why or why not.

b. Use a correctly labeled graph to show what happens in the market for chocolate as a result of the unit tax. On your graph, show the market equilibrium before and after the tax (i.e. show the equilibrium prices and quantities.) Show graphically what happens to consumer surplus and producer surplus after the tax (you may need a separate graph to show this.)

c. Will consumers be able to shift this tax to sellers? If yes explain why/how. If no explain why not.

d. Based on your answer to c, who will bear the incidence of this tax? Show this on a graph.

e. How will consumers respond to the tax on chocolate? How will candy companies respond strategically to the tax on chocolate?