Suppose an excise tax is imposed on a product being exchanged in a market that can be described with standard supply and demand curves. What happens to the consumer surplus as a result of the tax?
Some is transferred to producers and some is lost. Some is transferred to producers but nothing is lost. Some is transferred to the government and some is lost. Some is transferred to the government but none is lost.
From the standpoint of economic efficiency, how might one justify an excise tax on alcoholic beverages?
People who drink impose costs on others and the tax reduces this externality. The tax on alcoholic is a progressive tax. The tax keeps people from doing what is harmful to themselves. There is no justification; all excise taxes result in efficiency losses.
