Excise Tax

Here's an application: There is an "excise tax" on beer. What happens to price and sales when such a tax is imposed?
(The term "excise tax" is a bit redundant, since "excise" is an old word for "tax." Conventionally, though, an excise tax means a tax per physical unit; for example, per gallon).

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Figure 10. Who Pays an Excise Tax?

The figure shows the impact of an excise tax. From the point of view of sellers, the tax decreases demand from D to D'; the vertical distance between the two curves is the tax. The price paid to the seller falls, but not as much as the tax, because the cutback in production moves downward along the supply curve.

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