Draw a sketch to illustrate the excess burden of the tax

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Question: In an effort to reduce alcohol consumption, the government is considering a $1 tax on each gallon of liquor sold (the tax is levied On Producers). Suppose that the supply curve for liquor is upward sloping and its equation is Q = 30,000P (where Q is the number of gallons of liquor and P is the price per gallon). The demand curve for liquor is Q = 500,000 - 20,000P.

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 SI 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?

Reference no: EM131490632

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