The reason behind the different tax structure between resident
and foreign tourists can be attributed to their different
elasticity of demand. To illustrate this proposition, we consider
two groups of people – Home and Foreign, where the Home Group
currently resides in City ‘X’ and Foreign Group wants to visit City
‘X’ during the vacations. Let us analyze the situation
carefully:
Seeing this, the mayor levies a higher tax on tourists visiting the city abroad in order to maximize his tax revenue, since for an inelastic demand
Thus, the different taxation regime is definitely economically justified. It is also politically motivated, as when residents of the City ‘X’ notice that they are paying a lower tax rate than the tourists, they might feel inclined to the current regime.
5. Briefly explain why the local city authorities in major cities of tourist destinations in the...