3. Please illustrate in one market: a. a $0.15 excise tax b. a $0.15 sales tax...

3. Please illustrate in one market:
a. a $0.15 excise tax
b. a $0.15 sales tax (independently, not a sales and excise tax)
c. Does the legal incidence of the tax affect the economic incidence?
(Be sure to label all graphs and curves.)

Expert Solution

Ans) 1)When government imposes tax on sellers, supply curve will shift upwards with the amount of tax. Tax creates a wedge and burden of tax is shared by both buyers and sellers.

2) When tax is imposed on buyers, demand curve will shift downwards by the amount of tax. Tax creates a wedge between supply and demand curve and burden of tax is shared by both buyers and sellers.

3) It does not really matter upon whom the tax is imposed. Burden of tax will be shared by both buyers and sellers. Further, the side of market, which is less elastic, bears the greater burden of tax.

Here, we have assumed that elasticity of supply and demand are equal. Therefore, burden of tax will be equally shared by buyers and sellers regardless upon whom the government imposes tax.

Rahul Sunny answered 3 weeks ago

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