The price elasticity of demand for wine is estimated to be 1 at all possible quantities. Currently, 200 million gallons of wine are sold per year, and the price averages $6 per bottle. Assuming that the price elasticity of supply of wine is 1 and the current tax rate is $1 per bottle, calculate the current excess burden of the tax on wine.
Suppose the tax per bottle is increased to $2 per bottle.
What will happen to the excess burden of the tax as a result of the tax increase? Under what circumstances can a doubling of the tax on wine actually improve resource use in the United States, despite the increase in the excess burden of the tax?

  • CreatedAugust 22, 2015
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