Question

(A):    Explain Incidence of Taxation and its impact on market efficiency. How the tax burden is shared between buyers and sellers?

(B): Keeping in view the demand –supply analysis, how the following events will affect the prices and quantities/output in the market? (Answers must be supported by a neat and clean diagram):                                                       

  

If government imposes 5% custom duty on the import of spare parts in the automobile sector;

If government announces to introduce value added tax (VAT) in the white goods sector.

Answer 1

Solution:-

(a) Explanation:

Incidence of Taxation:

Incidence of taxation meant to be the economic word that is being used for division of tax burden between buyers and sellers. This term is being used and related to the price elasticity of supply and demand as tax burden happened to be fall on buyers when supply being more elastic than demand. Seller feels the burden of tax when situation happens to be, demand more elastic than supply.

Impact on market efficiency:

Consumer get affected very highly and even little change can lead to bigger change in demand of product. Taxation can cause the market price of product to get increased instantly. Consumers have to pay more than producer. Demand of the good be decreased when there is minor increase in price of the product due to increase in tax.

How the burden being shared among buyer and seller:

Burden of tax between buyer and seller differs with the elasticity of demand and supply, when elasticity is unitary both buyer and seller share the tax burden equally, when demand is elastic and supply is inelastic most of the burden of tax comes on seller. When demand is inelastic and supply is elastic the burden of tax comes on buyer.

b)

Imposition of tax on spare parts shall increase cost of supply, hence supply shall shifts to left and elasticity of demand and supply shall decide actual distribution of tax between buyer and seller: