Prior to any taxes,the equilibrium price of gasoline is $3 per litre.Then,a $1 per litre tax is levied.As a result,the price of gasoline rises to $3.75 per litre.The incidence of the $1 tax is _____ paid by consumers and _____ paid by producers.

Question

Quizplus · Accepted Answer

The incidence of the tax refers to who ultimately bears the burden of the tax, in terms of how much the price of the item increases and who receives less money as a result. Because the price of gasoline increased from $3 to $3.75 per litre, consumers are paying an additional $0.75 per litre. However, producers are only receiving $0.25 of the $1 tax, since the other $0.75 is passed on to consumers. Therefore, the answer is D: consumers pay $0.75 and producers pay $0.25 of the $1 per litre tax.

Prior to Any Taxes,the Equilibrium Price of Gasoline Is $3