Suppose the supply-and-demand schedules for cigarettes are as follows:
- What are the equilibrium price and equiiibrium quantity?
- Now the government levies a $1.25 per carton excise tax on cigarettes. What are the new equilibrium price paid by consumers, the price received by producers, and the quantity?
- Explain why it makes no difference whether Congress levies the $1.25 tax on the consumer or the producer.
(Relate your answer to the discussion of the payroll tax in the text.) Suppose the tax is levied on the producers. How much of the tax are producers able to shift onto consumers? Explain how they manage to do so. Will there be any excess burden from this tax? Why? Who bears this excess burden? By how much has cigarette consumption declined on account of the tax? Why might the government be happy about this outcome, despite the excess burden?