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You are the head of the revenue department in a state that needs to raise revenue. Since you work in a politically correct state, you are limited to levying per unit taxes of any amount on cigarettes, alcohol, and Hummers. You decide to levy a $1 tax per gallon of alcohol sold. The demand for alcohol is
Q = 500,000 - 20,000P.
The supply of alcohol is
Q = 30,000P,
where Q is in gallons and P is in dollars.
a. What is the price of alcohol before the tax?
b. What is the price of alcohol after the tax?
c. Calculate the tax revenue.
d. Calculate the excess burden (deadweight loss) of the tax.
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