Revenue from a per-unit tax

Tax revenue is the tax per unit times the number of units sold after the tax.

After the tax, supply shifts up from S to S1 by t, and the market settles where S1 meets demand, at point G. Quantity falls from Q0 to Q1. Buyers now pay P1. Sellers keep P1 minus t, which the diagram labels P2.

So the tax per unit is the vertical gap from P1 down to P2, and it is collected on Q1 units. That is the rectangle with corners P1, G, I and P2: from the price axis out to Q1, between the price buyers pay and the price sellers keep.

Each choice

• A. This rectangle runs from P1 all the way down to the origin, so it is the total amount buyers spend, P1 times Q1. Only the slice between P1 and P2 goes to the government.
• B (correct). The tax per unit is the gap between what buyers pay and what sellers keep, P1 minus P2, and it is collected on the Q1 units still sold.
• C. This uses the old quantity Q0 and only the rise in buyers' price. After the tax only Q1 units sell, and the tax per unit is the whole gap from P1 to P2.
• D. This is only the part of the revenue that comes out of buyers' pockets, the rise from P0 to P1. Sellers pay the rest, the drop from P0 to P2.
• E. This is only the sellers' share of the tax, the fall from P0 to P2 on each unit. The buyers' share above P0 is collected too.