To meet its commitments under the Montreal Protocol, the United States implemented certain market-based policy instruments, including an excise tax on ozone depleters. Consider the following market for CFC-12 before the excise tax is imposed, where P is price per pound.
Demand : Q ¼ 18:40 - 0:5P Supply : Q ¼ 10:00 þ 2:5P
Now assume that a 60 cent excise tax is used, which shifts the supply curve to Q′ = 8.50 + 2.5P.
a. Find the equilibrium price before and after the tax is implemented.
b. What do you conclude about who bears the primary burden of the tax-buyers or sellers? Briefly explain the economic sense of this out- come in this particular context.