Question

We understand that an excise tax will result in a difference between the price the consumers pay and the (net) price the firm keeps for each unit. Often, this results in a “disruption” in the market as equilibrium output decreased. For this example, suppose we look at the market for land and let’s assume that the supply of land is fixed (I realize that some countries have “reclaimed land from the sea,” but lets ignore those) and the supply curve is perfectly vertical but the demand curve has conventional downward slope.

1. Graphically depict the initial equilibrium price and quantity of acres of land.
2. Now suppose the government imposes an excise tax of $1000 per acre of land. Depict the new outcome, making sure to show the new equilibrium prices, net prices, etc. to the various participants in the market.
3. In the nineteenth century, a politician Henry George advocated the Land Tax as the source of government income, arguing that this type of tax has no distorting impacts on resources or resource usage. Given your results in (b), please explain this position.

Answer 1

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