Price elasticity of demand

What is the relationship between the tax rate and the excess burdens?

1. 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.

  • What is the excess burden associated with a tax of 10% on wine?
  • What is the excess burden associated with a tax of 20% on wine?
  • Using your answers in a. and b., what is the relationship between the tax rate and the excess burdens?
  • Under what circumstances can a doubling of the tax on wine actually improve efficiency? (you will need to remember course material from before the midterm).

1. 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.

  • What is the excess burden associated with a tax of 10% on wine?
  • What is the excess burden associated with a tax of 20% on wine?
  • Using your answers in a. and b., what is the relationship between the tax rate and the excess burdens?
  • Under what circumstances can a doubling of the tax on wine actually improve efficiency? (you will need to remember course material from before the midterm).

2.Rosen/Gayer, p. 370, #1 see the file attached

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