Before an excise tax is imposed, the market equilibrium price for ferry crossings is $90, and the equilibrium quantity is 900 crossings per day.

Assume the government imposes a $20 excise tax Assume the government imposes a $20 excise tax. The supply curve for Maritime Ferry would decrease, or shift to the left. Maritime’s cost increases by $20 for every vehicle, so there is a parallel shift upward by $20.

Initially, Maritime Ferry would try to pass this cost through to its customers and increase its price from $90 to $110 per car. At $110, Maritime Ferry would still be willing to supply 900 ferry crossings per day. However, customers would only be willing to buy 700 crossings per day, resulting in a daily surplus of 200 crossings!

Eventually, a new equilibrium price and quantity would be reached at a price of $100 per ticket and a quantity of 800 ferry crossings per day.

The tax revenue is represented by the blue and green shaded areas and is equal to $16,000 ($20 tax x 800 ferry crossings).

The blue shaded area shows the portion of the tax that Maritime’s customers pay in the form of $10 more per crossing ($100 instead of $90). At 800 crossings per day, consumers pay $8,000 ($10 tax x 800 ferry crossings) in taxes.

The green shaded area shows the portion of the tax that Maritime Ferry pays. Consumers pay $100 per crossing, which is $10 more than the equilibrium price before the tax. However, Maritime Ferry must pay the government $20 of that $100, so its actual revenue per crossing is only $80. The company incurs a loss of $10 per crossing from what it would have been paid before the tax. Therefore, the total tax paid by Maritime Ferry is equal to $8,000 ($10 tax X 800 ferry crossings).

Finally, the excise tax causes a deadweight loss that is measured by the loss of production and a higher price when the tax alters the market equilibrium. The tax pushes the equilibrium price from $90 to $100, and there is a cost to society of 100 fewer ferry crossings. This loss is shown as Triangle BDE.