Question

According to a news story, Pennsylvania’s liquor tax is “paid by the seller—the restaurant or bar owner—when the seller buys liquor from state-run wine and spirit stores.” Briefly explain the effect of how liquor taxes in Pennsylvania are collected has on the price of a glass of wine a consumer purchases in a restaurant in the state.

Answer 1

'Tax' is an obligatory monetary payment made to the government or respective authority by the consumer on account of using that product or availing any services.This may be levied with different mottos to accomplish different desired results.This may be revenue generation or curbing demand or supply etc.Here in this particular case of Pennsylvania,the tax is being levied on the liquor by the authority.A tax has direct and indirect implications on Price,Supply or Demand of any good.The next point to be noted is that the tax is to be bore by whom means who needs to pay the taxes.This has a bit different implications on the market equilibrium,the supply or the demand of any product.This might be the supplier or the consumer and in this case as mentioned above the supplier has to bear the cost of tax.Any tax directly impacts the price of any good or services.Here as the supplier has to primarily bear the cost of the tax on the liquor so this would directly impact their profit margin and we know that the supply of any commodity depends upon the amount of profit that the supplier receives by supplying or producing any good.As the above mentioned tax would reduce the chances of earning more profits.So the very first implication would be that this tax would discourage him to supply more liquor and in some or the other form he would definitely do so.This would reduce the supply of liquor in the market to some extent.And due to existing demand,demand would exceed the supply so price would tend to increase.Also it is commonly observed that a supplier tries to pass on the implications of tax on the consumer to much extent and hence this would make the liquor even more costlier and consumer would decrese the demand to much extent and a new level of equilibrium would be established in the market.This might force many restaurant owner or seller to shut down their business leading to fall in the GDP and rendering many unemployed.This way this Tax might have several micro and macro implications on the market.

At the same time we need to keep in mind that Liquor is not a normal good in general and so the this point might impact the degree of implications of above mentioned points to some extent however the general concepts at micro and macro level would definitely work.