Question

1. The state of Tennessee introduces a tax on movie tickets of 50 cents to be paid by theatre owners. Following the tax, the price of a movie ticket increases 30 cents.

Suppose that instead of the state of Tennessee, the federal government of the United States decided to impose a 50 cent tax on movie tickets.

1. How would the economic incidence of a federal tax likely compare to that of a tax imposed solely in the state of Tennessee?

Answer 1

A federal tax cannot be escaped because it has to be paid wherever people go and watch the movie. But the tax imposed only in the state of Tennessee can be escaped by watching the movie in other states where the tax not applicable. This indicates that the demand for movie for the entire country as a whole is relatively inelastic then the demand for movie in the state of Tennessee.

This also indicates that compared to a federal tax, the economic incidence of tax imposed in the state of Tennessee only is relatively smaller and weak. This is because people can avoid paying tax by watching in other states, there by the reduction in quantity is more then the increase in price of tickets. For the federal tax the economic incidence is stronger and the the tax wedge between buyer's price and seller's price is greater.