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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:

  1. The size of the excise tax (i.e. the tax per widget).
  2. The government revenue from the excise tax.
  3. The amount by which license fees will have to change if the tax is imposed.
  4. 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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