2a. The market price of an Internet service is $20 a month because that is the
price at which the quantity demanded equals the quantity supplied.
2b. If the government imposes a tax of $15 a month on Internet services, buyers
pay $30 a month for Internet services.
2c. If the government imposes a tax of $15 a month on Internet services, sellers
receive $15 a month for Internet services.
2d. The buyer pays more of the tax because the price the seller receives falls by
only $5 while the price the buyer pays rises by $10.
2e. With the tax, the quantity of Internet services is 15 units per month. The
government collects a tax of $15 a month on each unit, so the government
collects $15 a unit  15 units, which is $225 a month.
2f. The excess burden is equal to the area of the deadweight loss triangle. The
area of the triangle equals 1/2  base  height. The deadweight loss triangle
has a base of 5 units a month, the difference between the initial equilibrium
quantity and the quantity after the tax is imposed. The triangle’s height is
equal to the tax, $15 a month. So the excess burden equals 1/2  5 units 
$15 a unit, which is $37.50 a month.
3a. Because the supply is perfectly elastic, the
buyers pay all the tax. So, as illustrated in
Figure 8.1, the price rises by the full amount of
the tax and buyers pay $1.2 million per boat.
3b. Because the supply is perfectly elastic, the
buyers pay all the tax and the sellers pay none
of the tax.
3c. The price rises 20 percent. The elasticity of
demand is 1.0, so the quantity demanded
decreases by 20 percent. Before the tax, 240
boats were bought, so the tax decreases the
number of boats sold by (240 boats)  (20
percent), which is 48 boats. So after the tax, 192
boats are bought. The government collects a tax
of 20 percent on each boat, so the government
collects $200,000 tax on each. The total tax the
government collects is ($200,000 a boat)  (192
boats), which is $38.4 million.
3d. The shaded area in Figure 8.1 is the excess burden of the tax.
3e. The tax is not efficient. Marginal benefit exceeds marginal cost and a
deadweight loss is created.
3f. Only very rich people buy luxury boats. So, according to the benefits
principle, the tax can be considered fair if the tax revenue is spent on
services that benefit private boat owners. According to the ability-to-pay
principle, the tax is fair.
4a. Before the tax, the price of a tube of toothpaste is $1.50. After the tax, the
buyers pay $2.00 a tube.
4b. The buyers pay $2.00 a tube, but the sellers pay $1.50 in tax. So the sellers
receive $0.50 a tube.
4c. With the tax, the equilibrium quantity is 7,000 tubes a week. The
government collects $1.50 tax a tube, so the government collects 7,000 tubes
 $1.50 a tube, or $10,500 a week.
4d. The excess burden is equal to the area of the deadweight loss triangle. The
area of the triangle equals 1/2  base  height. The deadweight loss triangle
has a base equal to the difference between the pre-tax equilibrium quantity
and the post-tax equilibrium quantity. Before the tax, the equilibrium
quantity was 8,000 tubes a week and after the tax the equilibrium quantity
is 7,000 tubes a week. So the base of the deadweight loss triangle is 1,000
tubes a week. The triangle’s height is equal to the tax, $1.50 a tube. So the
excess burden equals 1/2  1,000 tubes  $1.50 a tube, which is $750 a week.
5a. The toothpaste manufacturers are bowing to
market forces. Figure 8.2 shows the situation.
After the tax is imposed, Figure 8.2 shows that,
including the tax, consumers pay $2.00 a tube.
Manufacturers must send $1.50 to the
government as the tax, so the supplier must set
a price of $0.50. (Which is shown in the figure
from the S + tax curve.) If the suppliers tried to
set any price higher than $0.50 a tube, there
would be a surplus of toothpaste because at
any higher price, the quantity supplied by the
manufacturers exceeds the quantity demanded
by consumers.
5b. If the pre-tax price charged by toothpaste
manufacturers fell by less than $1.00, the price,
including the tax, of a tube of toothpaste
exceeds $2.00 a tube. At any price, including
the tax, greater than $2.00 a tube, Figure 8.2 shows that there is a surplus of
toothpaste.