Question

Suppose that the government enacts a tax on retail sales of road salt, which homeowners and businesses put on walkways and driveways. Assume that the supply of salt is perfectly elastic, due to the ease with which suppliers can stockpile the product.

Before the tax, 1000 fifty-pound bags of road salt are sold at an equilibrium price of $6.5 per bag. After the tax, 775 bags are sold at $8 per bag. How much revenue does the tax generate for the government?

What is the amount of the tax? $    per bag

Answer 1

Answer:

As, Supply Curve is Perfectly elastic Our supply curve is horizontal. Now Government introduced tax on salt this will shift our supply curve upwards as shown in the figure below:

Because supply curve is perfectly elastic the increase in market price after tax is equal to per unit tax levied on the salt.( It is more clear from the above graph).

Calculate the revenue generated from the tax for the government as follows:

Revenue generated = Amount of tax x Quantity after tax

= (8-6.5) x 775 = $1,162.5

Thus, the revenue generated from the tax for the government is $1,162.5

Calculate the amount of the tax per bag as follows:

Amount of tax = Price of bag before tax - Price of tax after tax

= 8 - 6.5 = $1.5

Thus, the amount of the tax per bag is $1.5.