Multiple Choice
Suppose a tax is imposed in each of the four markets shown in the graphs. In which market will consumers bear the largest share of the tax burden?
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6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
Multiple Choice
In a supply and demand diagram, the vertical distance between points A and B represents a tax in the market. What does this vertical distance specifically measure?
A
The equilibrium price before the tax was imposed
B
The per-unit amount of the tax imposed on the good
C
The total revenue generated by the tax
D
The difference between consumer surplus and producer surplus
Verified step by step guidance1
Understand that in a supply and demand diagram, the vertical axis represents the price of the good, while the horizontal axis represents the quantity.
Recognize that a tax imposed on a good typically shifts either the supply curve upward by the amount of the tax (if it is a tax on producers) or the demand curve downward (if it is a tax on consumers).
Identify points A and B on the diagram as corresponding to prices before and after the tax is imposed, or prices paid by consumers and received by producers after the tax.
Note that the vertical distance between points A and B measures the difference in price per unit caused by the tax, which is the per-unit tax amount.
Conclude that this vertical distance does not represent total revenue, equilibrium price before tax, or surplus differences, but specifically the per-unit amount of the tax imposed on the good.
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