Question

There are two goods: Insulin Shots and Movies. A policy maker wants to impose an excise tax on one of these goods. There is a debate about this, and the debating points are: Naïve Debating point 1: You should tax Movies. Diabetes patients need insulin shots on a daily basis. Hence, these consumers should not bear the burden of the tax. Movies are immoral anyway. So we should tax movies, and let the movie-goers bear the tax burden. Naïve Debating point 2: We should tax insulin shots, because patients who need them will surely buy them anyway, and hence, the associated DWL will be lower in this case. If we tax Movies, then the associated DWL is going to be higher. So tax insulin shots. Which debating point is right? Can you support your answer with a graph ?

Answer 1

As we enter into deciding about which one of the two goods need to be taxed, we have to check out their usage i.e. where it is used, to be more specific, is it a necessity or want. In this case, the insulin shots that are used for treating type1 Diabetes patients which actually forms a part of the healthcare and thus turns to be a necessity for a human, on the other hand, Movies are recreational sources and forms part of entertainment which is not a necessity. Thus, it is very much evident that both from the view point of moral values, ethics and economics, it is very much right to tax movies rather than taxing a necessity good insulin.

Graphical Explanation:

curve so consumer Surplus Supply 7 5 El Deadweight loss brice 3 2 rice Denard Rise alue to Jose I Produces Surplus 13.50 x 2 4. 3 6 1 7 8 quantity

The above graph represents the deadweight loss caused due to the imposition of excise duty. Moreover, the burden of taxes being imposed gets transferred onto the consumers and not to the producers. Thus, in the graphical representation 'E' is the initial Equilibrium achieved for any good (say) Insulin shots or movies and as the excise duty is imposed by a value of $1 the price of the goods rises leading to fall in demand establishing a new equilibrium at point 'E1' and causing a reduction in the part of consumer and producer surplus that causes Deadweight loss by the area identified in the diagram. Thereby, such case imposition of excise duty for medicine may affect the potentiality of person to afford it or not. However, a person can bear the rise in tax on movies because he spends on it at last after meeting all the necessary expenses and thus the deadweight loss would not have any greater amount of negative effect on the consumer and the producer can deal with the loss in other factors such as charges on parking, beverages etc. .Thus, excise duty shouldn't be imposed on Insulin shots rather it is economically and ethically decisive to have it on movies.