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Widgets are produced by a competitive industry and sold for $5 apiece. Each widget firm must have a license. The government sets the highest license
Widgets are produced by a competitive industry and sold for $5 apiece. Each widget firm must have a license. The government sets the highest license fee that widget firms are willing to pay. If the widget industry were monopolized, widgets would sell for $8 apiece.
The government is considering imposing an excise tax that would cause the price of widgets to rise to $8. Use a graph to illustrate the following:
- The size of the excise tax (i.e. the tax per widget).
- The government revenue from the excise tax.
- The amount by which license fees will have to change if the tax is imposed.
- The net gain to the government from imposing the excise tax (accounting for both the excise tax revenue and the license fees).
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