The following figure shows the supply and demand curves in a competitive market for a good. The government is considering a $1.50 tax on this good.

-Refer to the above figure.If the $1.50 tax is collected from the producers of this good,the government's revenue off of this taxation will be ________.

Question

The following figure shows the supply and demand curves in a competitive market for a good. The government is considering a $1.50 tax on this good.
 
-Refer to the above figure.If the $1.50 tax is collected from the producers of this good,the government's revenue off of this taxation will be ________.

Quizplus · Accepted Answer

The government's revenue from taxation is equal to the tax per unit times the quantity sold. In this case, the tax per unit is $1.50, and the quantity sold after the tax will be 20 units (the quantity at the new equilibrium point). Therefore, the government's revenue will be $1.50 x 20 = $30. However, we must subtract the original revenue that the government received at the pre-tax equilibrium point, which was $4.50 (10 units sold x $0.45 price per unit). Thus, the government's additional revenue off of this taxation will be $30 - $4.50 = $25.50. Rounded to the nearest dollar, the answer is C: $4.50.

The Following Figure Shows the Supply and Demand Curves in a Competitive