Suppose the current equilibrium price of cheese pizza is $10, and 10 million pizzas are sold per month. After the federal government imposes a $0.50 per pizza tax, the equilibrium price of pizzas rises to $10.40, and the equilibrium quantity falls to 9 million.
Illustrate the situation with a demand and supply graph. Be sure your graph shows the equilibrium price before and after the tax, the equilibrium quantity before and after the tax, and the areas representing consumer surplus after the tax, producer surplus after the tax, tax revenue collected by the government, and deadweight loss.
How is the tax burden divided between buyers and sellers?
