Excise Tax Experiment
Today, we return to our market for cardboard rectangles. As in the first experiment, the instructor
will divide the class into two groups. Some of you will be producers of small rectangles of
colored cardboard; others will be consumers of these small pieces of cardboard. Today’s trading
sessions, however, will incorporate two important differences. [1] Instead of just two types of
consumers and two types of producers, there will be several types of each. This should make
trading a bit more interesting than it was before. [2] A new (and perhaps unwelcome) player, the
Tax Collector, makes his debut.
Assumptions:

In this experiment, there will be three market sessions. In the first session, there are no taxes.
In the second session, producers (sellers) will have to pay a $15 excise tax if they accept an
order for a piece of cardboard. In the third session, consumers (buyers) will have to pay a
$15 excise tax if they place an order for a piece of cardboard.

You are likely to play a different role in each of the three sessions, but the overall distribution
of consumers and producers will be the same in all three sessions. Procedures are similar to
the first experiment, as are as follows:

Each consumer can place an advanced order for one, and only one, piece of cardboard,
per trading round.

Each producer can accept an advanced order for one, and only one, piece of cardboard
per trading round.

The instructor will provide each consumer with a number indicating the maximum
amount he or she is willing to pay for a piece of cardboard: the “MWTP” (maximumwillingness-to-pay, or consumer’s reservation price) is a number between $1 and $100.
In sessions 1 and 2, the consumer’s score for a single trading round equals the difference
between his or her MWTP and the price he or she negotiates with a producer. For
example, if a consumer’s MWTP is $80 and he pays $30 for a piece of cardboard, his
score is $50. Each consumer has the option of not placing an order for a piece of
cardboard. This will be sensible if the best price he or she can negotiate is greater than
your MWTP. If a consumer does not place an order, his or her score will be zero. A
score of zero is better than a loss (negative score). In session 3, consumers pay an excise
tax of $15 when they place an order for a piece of cardboard. Therefore, a consumer’s
surplus is MWTP – P – $15. A consumer does not have to pay the tax if he or she does
not place an order.

The instructor will provide each producer with a number indicating her or his “MWTS”
(minimum-willingness-to-sell, or seller’s reservation price which is determined by the
cost of producing a piece of cardboard [a number between $1 and $100]). In sessions 1
and 3, the producer’s (or seller’s) score for a trading round equals the difference between
the negotiated price and her or his MWTS. For example, if a producer takes an order for
a piece of cardboard for $20 and her cost is only $15, her score is $5. Producers have the
option of not taking any orders. This will be sensible if the best price she or he can
negotiate is less than her or his MWTS. If a producer does not accept an offer for an
order, her or his score will be zero. A score of zero is better than a loss (negative score).
In session 2, producers pay an excise tax of $15 when they accept an order for a piece of
cardboard. Therefore, a producer’s profit is P – MWTS – $15. A producer does not have
to pay the tax if he or she does not accept an order.

A consumer may announce how much he or she is willing to pay and wait for a producer
to accept that price. Alternatively, a producer may announce how much she or he
requires to accept an order, and wait for a consumer to place an order at that price.
Consumers do not have to publicly announce their MWTP; nor do producers have to
announce their MWTS.

Once a transaction has been arranged, the two people (one consumer and one producer)
inform the instructor of the trade, record the transaction, and then return to his or her seat.

There will be several trading rounds, each of which lasts a few minutes. After each
trading round ends, the instructor will list the transaction information on the board.

Your objective is to score as highly as you possibly can in each trading round. This will
likely require that you “shop around” – although you should bear in mind that only a few
minutes will be allowed for each trading round.
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 1
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $23.
Record of Prices and Profits
Price Paid
Profit (=P -$23)
Session 2
In this session, you are a cardboard producer. Your MWTS is $18. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$18 - $15)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $35. If you place an order for a
piece of cardboard you must pay to the government an excise tax of $15 in addition to the price
you pay to the seller for the piece of cardboard. If you do not buy a piece of cardboard, you do
not have to pay the excise tax.
Record of Prices and Profits
Price Paid
Surplus (=$35 -$P - $15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 2
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $18.
Record of Prices and Profits
Price Paid
Profit (=P -$18)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $35. In this session, you do not
have to pay an excise tax to the government; sellers do.
Record of Prices and Profits
Price Paid
Surplus (=$35 -$P)
Session 3
In this session, you are a cardboard producer. Your MWTS is $23. In this session, you do not
have to pay any tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P -$23)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 3
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $35.
Record of Prices and Profits
Price Paid
Surplus (=$35 -$P)
Session 2
In this session, you are a cardboard producer. Your MWTS is $23. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$23 - $15)
Session 3
In this session, you are a cardboard producer. Your MWTS is $18. You do not have to pay any
tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P -$18)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 4
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $25.
Record of Prices and Profits
Price Paid
Surplus (=$25 -$P)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $30. In this session, you do not
have to pay any tax, but sellers do.
Record of Prices and Profits
Price Paid
Surplus (=$30 - P)
Session 3
In this session, you are a cardboard producer. Your MWTS is $13. You do not have to pay any
tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P -$13)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 5
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $30.
Record of Prices and Profits
Price Paid
Surplus (=$30 -$P)
Session 2
In this session, you are a cardboard producer. Your MWTS is $13. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$13 - $15)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $25. If you place an order for a
piece of cardboard, you must pay to the government an excise tax of $15 in addition to the price
you pay to the producer.
Record of Prices and Profits
Price Paid
Surplus (=$25 - P -$15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 6
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $13.
Record of Prices and Profits
Price Paid
Profit (=P -$13)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $25. In this session, you do not
have to pay any tax, but the producer does.
Record of Prices and Profits
Price Paid
Surplus (=$25 - P)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $30. If you place an order for a
piece of cardboard, you must pay to the government an excise tax of $15 in addition to the price
you pay to the producer.
Record of Prices and Profits
Price Paid
Surplus (=$30 – P – $15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 7
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $28.
Record of Prices and Profits
Price Paid
Profit (=P -$28)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $45. In this session, you do not
have to pay any tax, but the producer does.
Record of Prices and Profits
Price Paid
Surplus (=$45 - P)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $40. If you place an order for a
piece of cardboard, you must pay to the government an excise tax of $15 in addition to the price
you pay to the producer.
Record of Prices and Profits
Price Paid
Surplus (=$40 – P – $15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 8
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $45.
Record of Prices and Profits
Price Paid
Surplus (=P -$18)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $40. In this session, you do not
have to pay an excise tax to the government; sellers do.
Record of Prices and Profits
Price Paid
Surplus (=$40 -$P)
Session 3
In this session, you are a cardboard producer. Your MWTS is $28. In this session, you do not
have to pay any tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P -$28)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 9
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $40.
Record of Prices and Profits
Price Paid
Surplus (= $40 - P)
Session 2
In this session, you are a cardboard producer. Your MWTS is $28. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$28 - $15)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $45. If you place an order for a
piece of cardboard you must pay to the government an excise tax of $15 in addition to the price
you pay to the seller for the piece of cardboard. If you do not buy a piece of cardboard, you do
not have to pay the excise tax.
Record of Prices and Profits
Price Paid
Surplus (=$45 -$P - $15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 10
Session 1
In this session you are a cardboard consumer. Your MWTP for a piece of cardboard is $20.
Record of Prices and Profits
Price Paid
Profit (= $20 - P)
Session 2
In this session, you are a cardboard producer. Your MWTS is $3. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$3 - $15)
Session 3
In this session, you are a cardboard producer. Your MWTS is $8. In this session, you do not
have to pay any tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P - $8)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 11
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $3.
Record of Prices and Profits
Price Paid
Profit (= P - $3)
Session 2
In this session, you are a cardboard producer. Your MWTS is $8. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$8 - $15)
Session 3
In this session, you are a cardboard consumer. Your MWTP is $20. If you place an order for a
piece of cardboard you must pay to the government an excise tax of $15 in addition to the price
you pay to the seller for the piece of cardboard. If you do not buy a piece of cardboard, you do
not have to pay the excise tax.
Record of Prices and Profits
Price Paid
Surplus (=$20 -$P - $15)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type 12
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $8.
Record of Prices and Profits
Price Paid
Profit (=P -$8)
Session 2
In this session, you are a cardboard consumer. Your MWTP is $20. In this session, you do not
have to pay an excise tax to the government; sellers do.
Record of Prices and Profits
Price Paid
Surplus (=$20 -$P)
Session 3
In this session, you are a cardboard producer. Your MWTS is $33. In this session, you do not
have to pay any tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P -$3)
Personal Information Sheet
Please hand in this sheet at the end of the class session.
Type X
Session 1
In this session you are a cardboard producer. Your MWTS for a piece of cardboard is $18.
Record of Prices and Profits
Price Paid
Profit (= P - $18)
Session 2
In this session, you are a cardboard producer. Your MWTS is $18. If you sell a piece of
cardboard, you must pay to the government an excise tax of $15. This tax is in addition to your
producer costs (MWTS). If you do not sell a piece of cardboard, you do not have to pay the
excise tax (or your production costs).
Record of Prices and Profits
Price Paid
Profit (=P -$18 - $15)
Session 3
In this session, you are a cardboard producer. Your MWTS is $18. In this session, you do not
have to pay any tax, but buyers do.
Record of Prices and Profits
Price Paid
Profit (=P - $18)