Question

How would the supply and or demand curve shift if a $4 tax was imposed on suppliers for each unit of caviar and milk sold? With visuals please explain how the tax incidence, DWL, and welfare effects differ between the two goods and why? as much explanation as possible would be greatly appreciated

Answer 1

Milk, being a necessity, has a relatively inelastic demand curve. Caviar, being a luxury, has a very elastic demand curve.

Demand is price inelastic when a change in price causes a smaller percentage change in demand. It occurs where there is a price elasticity of demand of less than one.in such case,imposition of tax will raise the price significantly but quantity would be reduced by a very small amount.Consumers bear the maximum burden of the tax compared to sellers.

If demand is price elastic – an increase in price causes a bigger percentage fall in demand.If demand is elastic. It means consumers are more sensitive to changes in prices. Therefore, an increase in tax will cause a big fall in quantity, and the price will rise only slightly. Therefore, the government will see a fall in tax revenue. Also, if demand is price elastic, the consumer burden will be smaller than if demand is inelastic.

Since tax per unit imposed is same on both the goods, but the fall in quantity of the good consumed is greater for caviar compared to milk, therefore, the deadweight loss is greater in market for caviar compared to milk

TERVR217172TIERT PEREXT212222ZEMREESKID 3787727 PRICE -- - Ptt >7iul TQUANTITY 70 8 PRICE PRI H e si so ET CAVIAR P+4A - Tc-77 TAI - > QUANTITY IVKY CScanned with CamScanner

this area is bigger in case of milk compared to that of caviar

this area is bigger in case of caviar compared to that of milk

this fall in quantity is greater in case of elastic good that is caviar compared to inelastic good that is milk