Question

In the town of Hooterville, all the downtown stores are identical and all the people who shop downtown are identical. The town can earn revenue in three ways: • It can charge each store a montly license fee. • It can charge an excise tax on the store’s merchandise. • It can charge shoppers to park on the streets (the only way to get downtown is to drive, so every shopper pays the parking fee). The town’s goal is to maximize its total revenue from all three sources. a) How big should the excise tax be? b) Suppose a court ruling requires the town to provide free parking. Now how big should the excise tax be? If necessary, you can answer in terms of labeled portions of graphs. If you do this, please be sure to say why these portions of your graph are relevant to the problem.

Answer 1

When all the downtown stores are identical and all the people who shop downtown is identical-

The town can earn revenue in three ways:

• It can charge each store a monthly license fee.

• It can charge an excise tax on the store’s merchandise.

• It can charge shoppers to park on the streets

Now consider that excise tax is any duty on manufactured goods which is levied at the moment of manufacture. It is typically a per unit tax, costing a specific amount for a volume or unit of the item purchased.

1. Even if the town’s motive is to maximize revenues, it should be imposed in such an amount that customer would not stop buying goods and the producer would not stop producing goods. It should be profitable enough for the parties to continue their market activity even after the imposition of the excise. There’s no particular percentage of what excite should be imposed on. It’s just that the consumer and producer should stay at their optimum and no loss should be there that is being borne by the parties. And also a particular percentage of excise cannot be told until and unless more information about is provided in the question.

2. Even if court ruling required free parking, excise doesn’t get change. Free parking and excise tax are two different things and there will be no effect that free parking will create on the excise imposition. It will be same as it was in the previous case.