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Assume the following table shows the demand and supply for bottles of whisky in the UK.
Price (£ per bottle)
Quantity demanded (millions of bottles)
Quantity supplied (millions of bottles)
40
6
15
36
7
13
32
8
11
28
9
24
10
a. Draw a diagram of demand and supply for whisky in the UK. Find market equilibrium price and quantity.
b. Suppose the government imposes an excise tax of £6 per whisky bottle. Find consumer price, producer price and the quantity sold after the tax. Show the effect of this tax on the diagram in (a).
c. Highlight tax revenue area on the diagram in (a). Calculate tax revenue raised by this excise tax.
d. Explain whether consumers or producers bear higher tax burden for whisky. [Hint: compare price elasticity of demand and supply]
e. Explain why this tax policy creates Deadweight Loss (DWL) in this market.
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