Question

Assignment 5-Q3 (12 points) For each of specific consumption taxes on the following items, answer briefly on (1) how the taxation will affect the equilibrium price and quantity of the item; and (2) which of consumers or producers are the main tax bearers. Explain your answer briefly. 1. Cigarette tax (hint: the demand for cigarette is price-inelastic.) 2. Kyoto temple sight-seeing tax (hint: the supply for temple sight-seeing is price-inelastic.)

Please provide your calculations and explanations. ( No handwriting pls because it is difficult to read..)

Thank you in advance.

Answer 1

1.) Cigrettes tax-

The demand for cigrette is price inelastic, it means that even when the price rises , quantity demand does not fall much.

Demand curve is nearly vertical.

If the tax is imposed on suppliers the supply curve will shift up.

1. Given the demand curve, After tax equilibrium price rises and equilibrium quantity falls. Price paid by consumers rises and price received by sellers falls. The difference in the prices is equal to the tax.

2. Consumers pay a higher burden of tax because demand is inelastic, as they don't reduce the quantity demanded in the same proportion as the rise in price. Suppliers on the other hand, have reduced the quantity supplied proportionally.

2)

Kyoto temple sight seeing tax

The supply is price inelastic, it means that even when the price falls , quantity supplied does not fall much. Supply curve is nearly vertical.

If the tax is imposed on suppliers the supply curve will shift up.

1. Given the demand curve, After tax equilibrium price rises and equilibrium quantity falls. Price paid by consumers rises and price received by sellers falls. The difference in the prices is equal to the tax.

2. Producers pay a higher burden of tax because supply is inelastic, as they don't reduce the quantity supplied in the same proportion as the fall in price. Consuemr on the other hand, have reduced the quantity demanded proportionally.

Burden of the tax-

For consumer=price paid after tax- Equilibrium price

For producers = Equilibrium price- price received after tax

It doesn't matter on whom the tax is imposed the party which is more inelastic bears more burden of the tax.