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In: Economics

using the Harbeger triangle, explain why removal of VAT on real estate and excise tax on...

using the Harbeger triangle, explain why removal of VAT on real estate and excise tax on petroleum products is considered as idle. use diagram where appropriate

Solutions

Expert Solution

VAT and Excise tax both are the tax imposed on real estate and petroleum products. Now the claim is considered to be ideal. we are going to examine this through the Harberger's triangle. Harberger's tringle describes it as the deadweight loss that occurs in the trade of a good or service due to the market power of buyers or sellers or government intervention. so these forces give the shape as curvilinear for both sides as the demand curve and supply curve, and the third side is a straight line determined by the tyle of the market and the type of government intervention. So in this given situation, Harberger's triangle can be right-pointing as these two types of products or the trade considered to be ideal.

When there is a sales tax or tariff it increases the burden of a buyer than the seller. The equilibrium quantity of goods determines at the point, where the difference between the buyer's and seller's reservation prices equals the value of the sales tax.

The Harberger triangle, in this case, has as one side the vertical line for the price of goods traded, and the other two sides are the parts of the demand curve and supply curve meet each other and determines equilibrium quantity. The triangle is rightward-pointing.

In the figure, the E and F triangle is the Harberger triangle representing the welfare loss. The triangle E loss for consumers and triangle Floss for producers.

The areas B and C also represent welfare losses for producers and consumers respectively, but these losses are absorbed by the government, so those are not considered as global welfare losses.


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