How to Calculate Excise Tax Revenue
Excise tax revenue equals the per-unit tax times the quantity traded after the tax, not the quantity that was traded before it.
The Excise Tax Revenue formula
Calculator
Enter the pre-tax equilibrium, the tax and the quantity after it to get revenue, the burden split and the DWL.
Where supply met demand before the tax.
The old equilibrium quantity. Revenue is never calculated on this number.
The wedge the tax drives between what buyers pay and what sellers keep.
Read up the demand curve at the new, smaller quantity.
The new equilibrium quantity. This is the one revenue is built on.
Tax times the 80 units still sold. Using the old quantity would claim $300, which is the classic error.
- Price sellers keep
- $9
- Revenue paid by consumers
- $160
- Revenue paid by producers
- $80
- Deadweight loss
- $30
- Who bears more of the tax
- Consumers bear more
What buyers pay minus the tax handed to the government.
Buyers pay $2 more per unit than before, across the new quantity.
Sellers keep $1 less per unit than before, across the new quantity.
Half of the 20 lost units times the $3 tax. It is a loss, not revenue, so it is not part of the total above.
How to calculate Excise Tax Revenue, step by step
- 1Find the pre-tax equilibrium. Read the price and quantity where supply meets demand before the tax; this is the baseline, not the quantity you multiply by.
- 2Find the quantity after the tax. The tax shifts supply up by the tax amount, so quantity falls. Read the new, smaller equilibrium quantity off the graph or the equations.
- 3Multiply the tax by the new quantity. Revenue = per-unit tax × Q after the tax. On the graph it is the rectangle between the price buyers pay and the price sellers keep, out to the new quantity.
- 4Split it by burden if asked. Consumer share = (price paid − pre-tax price) × new quantity; producer share = (pre-tax price − price kept) × new quantity. The two add back to total revenue.
Worked example: Excise Tax Revenue
A market for tires clears at $10 and 100 tires. The government adds a $3 per-unit excise tax. Buyers now pay $12, sellers keep 12 − 3 = $9, and quantity falls to 80 tires. Revenue = $3 × 80 = $240, not $3 × 100 = $300. Splitting it: consumers pay (12 − 10) × 80 = $2 × 80 = $160 and producers pay (10 − 9) × 80 = $1 × 80 = $80, and 160 + 80 = $240. The deadweight loss is a separate triangle: ½ × (100 − 80) × $3 = ½ × 20 × 3 = $30.
Excise Tax Revenue questions
Do you use the quantity before or after the tax?
Always the quantity after the tax, because no revenue is collected on units that are no longer sold. Using the pre-tax quantity overstates revenue and is the most common error on this question.
How do you find the deadweight loss from the same tax?
Deadweight loss = ½ × the drop in quantity × the per-unit tax. In the example that is ½ × 20 × $3 = $30.
Does a bigger tax always raise more revenue?
No, past a point quantity falls faster than the tax rate rises and revenue drops. Revenue is largest when supply and demand are relatively inelastic, since quantity barely moves.
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