Question

ou just won a contest and have been appointed City of New York Tax Commissioner (you might be asking, why did I enter such a contest? :)).

Your primary goal is two-fold: raise revenue and make the tax code more efficient. Since we are in the chapter on elasticity, you are aware that increasing prices (which increasing taxes do) can both increase and decrease revenue, and that lowering prices/taxes can both increase and decrease revenue.

You have to decide which goods to tax, which goods to raise taxes on and which good to lower taxes. Choose one of the following potential revenue sources and -- focusing on elasticity, supply and demand -- logically justify increasing the tax rate.

1. Alcohol, tobacco and gasoline are already heavily taxed. Should you raise these taxes? Select one and explain your answer.
2. Medical services, electricity and fruits and vegetables are not taxed. Should you start to tax these? Select one and explain your answer

Answer 1

Solution

We need to decide which goods to tax,which goods to raise taxes on and which goods to lower taxes

Yes, we should raise the taxes on Alcohol,tobacco and Gasoline (also called sin goods) because these goods when used extensively are harmful for an individual (or ) the society. Even though the taxes are increased on this ,it will not be effecting the revenue as their consumption will not be reduced due to price rise.

Given that Medical services,electricity and fruits & vegetables are not taxed.

Electricity - Should be taxed . In order to supply electricity to the consumers the electricity generating companies incur a lot of cost on raw materials such as coal,transportation costs,etc.,But the Governments generally subsidize these cost to some extent so that the electricity companies provide us power at lower costs.In this manner,the govt. incurs subsidy cost.

So,higher the usage of the electricity means indirectly the consumer is sucking more of govt.money in the form of subsidy.

So,by taxing the electricity consumption will reduce the burden on the govt. by pressurizing the consumers to use only the required amount of power.

Medical services - Medical services should not be taxed as it is a welfare service offered by the govt.It is the duty of the govt. to provide free and medical services to all it's people.

Fruits & Vegetables - Should not be taxed because they are essential commodities for human survival and moreover it promotes health of the individuals and also promotes agriculture rather than individuals eating outside foods with lower content of fruits & vegetables.

Hope this solution helps !! Please give a " Thumbs Up " rating for the same !!

Answer 2

Let's consider the potential revenue source of medical services and evaluate whether it would be logical to start taxing them.

In this case, it would not be advisable to tax medical services. Here's the explanation based on elasticity, supply and demand:

1. Elasticity: Medical services tend to have relatively inelastic demand. When people require medical attention or healthcare services, they are often willing to pay higher prices to obtain necessary treatment or improve their well-being. The demand for medical services is not highly responsive to price changes, meaning that increasing taxes on medical services would not significantly reduce the demand. Therefore, from an elasticity perspective, taxing medical services is unlikely to have a substantial impact on revenue generation.

2. Supply and Demand Dynamics: The supply of medical services is also relatively inelastic. Healthcare providers, such as hospitals, doctors, and medical professionals, have limited capacity to increase the quantity of services provided in response to changes in price. Taxing medical services could place an additional financial burden on healthcare providers, potentially leading to a reduction in the availability and quality of healthcare services. This could have negative consequences for public health and access to essential medical treatments.

3. Social Considerations: Taxing medical services could have adverse social implications, as it may disproportionately affect individuals with lower incomes or those who require frequent medical attention. In many countries, governments have policies in place to ensure affordable and accessible healthcare for their citizens. Imposing taxes on medical services could undermine these efforts and make healthcare less affordable for those who need it the most.

In summary, based on considerations of elasticity, supply and demand dynamics, as well as social implications, it would not be logical to start taxing medical services. The inelastic demand for medical services and limited supply response suggest that increasing taxes on medical services would likely have minimal impact on revenue generation while potentially compromising access to necessary healthcare and burdening vulnerable populations.