(Figure: Tax on Sellers of Soft Drinks) In the graph of the soft drink market shown here, the original equilibrium price is $2.50 per bottle. A tax is then placed on the sellers of soft drinks. The economic burden of this tax on the buyer is $ _____.
A)3.00
B)0.50
C)1.00
D)1.50

Question

(Figure: Tax on Sellers of Soft Drinks) In the graph of the soft drink market shown here, the original equilibrium price is $2.50 per bottle. A tax is then placed on the sellers of soft drinks. The economic burden of this tax on the buyer is $ _____. 
A)3.00 
B)0.50 
C)1.00 
D)1.50

Quizplus · Accepted Answer

When a tax is placed on the sellers of a good, the supply curve shifts upward by the amount of the tax. This creates a new equilibrium price and quantity where the demand curve intersects the new supply curve. In this case, the new equilibrium price is $3.00 per bottle.

The economic burden of the tax falls on both the buyers and sellers, but the question specifically asks about the burden on the buyer. In general, the burden of the tax will be shared between the buyers and sellers according to the relative elasticities of demand and supply.

In this case, the demand for soft drinks is relatively inelastic (i.e. not very responsive to changes in price) while the supply is relatively elastic (i.e. very responsive to changes in price). This means that the buyers will bear a larger portion of the burden than the sellers.

To calculate the exact amount of the burden on the buyer, we can look at the difference between the old and new equilibrium prices ($3.00 - $2.50 = $0.50) because the price increase is fully attributed to the tax. Therefore, the answer is B.

(Figure: Tax on Sellers of Soft Drinks) in the Graph