Suppose an additional "special" tax of $0.10 per litre is imposed on the sale of gasoline in one province.Prior to the tax the price was $1.30 per litre and 10 million litres of gasoline are sold per day.After imposition of the tax,the new equilibrium price and quantity are $1.38 per litre and 9.6 million litres per day.What is the direct burden of this "special" tax?

Question

Quizplus · Accepted Answer

The direct burden of the tax is the amount of revenue collected from the tax, which is equal to the tax per litre multiplied by the quantity sold.

Before the tax, the quantity sold was 10 million litres per day, and the tax is $0.10 per litre. So the revenue collected from the tax would have been:

$0.10 per litre x 10 million litres = $1 million per day

After the tax, the quantity sold is 9.6 million litres per day, and the price is $1.38 per litre. The price without the tax is $1.30 per litre, so the tax is $0.08 per litre ($1.38 - $1.30).

Using the formula above, the revenue collected from the tax after the imposition of the tax is:

$0.08 per litre x 9.6 million litres = $768,000 per day

Therefore, the direct burden of the "special" tax is $768,000 per day, which is answer choice B.

Suppose an Additional "Special" Tax of $0