Define an excise tax and give three examples. Explain the relationship between a tariff and an excise tax. Use supply and demand analysis to explain why the equilibrium price of apples will rise and the equilibrium quantity will fall if an excise tax is levied on apples. Explain why the price of apples will not rise by the full amount of the tax.

Question

Quizplus · Accepted Answer

The Answer is Excise taxes are taxes levied on a specific good. Examples include the tax on cigarettes, the tax on alcohol, and the tax on gasoline. A tariff is an excise tax on an imported good.
If an excise tax were levied on apples, the supply curve of apples would shift upward by the amount of the excise tax. The new supply curve of apples would lie parallel to the old one and would lie above it by an amount equal to the excise tax. The new supply curve would intersect the demand curve at a higher price and at a lower quantity. (Apples would cost more, but fewer apples would be sold.) The equilibrium price would rise by less than the full amount of the tax because, at a lower quantity, the cost of production per additional apple would be lower. We would move down along the supply curve thus partially offsetting the effect of the upward shift in the supply curve that was caused by the newly imposed excise tax.

Define an Excise Tax and Give Three Examples