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Evaluate the following statement: "If there is fixed amount of land in Chicago, then a sales...

Evaluate the following statement: "If there is fixed amount of land in Chicago, then a sales tax on Chicago land will have no effect on social welfare. "

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Answer #1

This statement is incorrect

if there is a fixed amount of land in Chicago it would imply that the supply curve of land will be vertical. In such a scenario sales tax will entirely be borne by the landowners and the price of land for buyers will be unchanged. This happens because when supply is perfectly inelastic the entire tax burden is borne by the sellers. Similarly if demand is perfectly inelastic buyers have to face the entire burden of tax. Because there is a difference between the price received by buyers and sellers there is reduction in the social welfare in the form of deadweight loss.

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