Answer to Question #193260 in Microeconomics for Rubab

Question

suppose the government levles an excise tax of $3.00 per pack on cigarette buyers. Draw after-tax curve and the tax revenue that will be collected by the government.

Answer 1

In the above figure, D0 is the per tax dd curve and Dt is the post tax dd curve i.e. due to imposition of taxes the dd curve has shifted leftwards by the tax amount ‘t’. Again, Pb is the post-tax price paid by the buyers, Ps is the post tax price received by the sellers and Qt is the post tax cigarettes sold in the market (which is less than initial quantity Qe). Also the amount of tax collected by the government is represented by the shaded region in the above figure. The tax revenue of the government can be calculated as the product of t (tax rate = $ 3.0) and Qt (post-tax quantity).