Question

The local government recently decided to issue a tax of a quarter of a percent on certain goods and services to pay for “Parks, Recreation, and the Arts”. It is expected this tax will raise millions of dollars for this purpose.

A. Explain the difference between an ad valorem tax and an excise tax.

B. Graphically illustrate the type of tax being proposed by the local government on certain goods and services. Explain.

C. Graphically illustrate how an excise tax would likely affect likely affect the market for these certain goods and services being taxed.

D. What type of tax would you propose to pay for the local government policy and why?

Answer 1

(A) An excise tax is lenied on the quantity of the good consumed while ad- vole valorem tax is lenied an the value of the good. (& The Government has proposed excise tax to be tenned an goods and services. It can be depicted in the graph with leftward shift of the supply curve of the good. x4 die ce Tax increases cost of production and this shifts the brice Supply Curve leftwards to sist e - Deadweight and at new equilibrium point to prices have increased and equilibrium duantity has fallen to I O . It reduces overall surplus at in the market by the amount of & q Quantity x deadweight loss. This imposition of Taxes reduces efficiency in the market! di A lumpsum Tax reduces Total surplus by a lesser not as compared to excise Tax. Thus humpsun tar like income tax is better atten Los