To the right we show a market initially in equilibrium with a price of $4.50 and quantity bought and sold of 60. We illustrate the addition of an excise tax of $4 per unit by showing a second supply curve, St, $4 above the firm's supply curve S.

    After the tax is imposed, the equilibrium price increases to $6.00 and quantity falls to 40 units. In general, the market price does not rise by the full amount of the tax. In this instance, the imposition of a $4.00 tax only leads to a $1.50 increase in market price. Who pays the rest?

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