Question

3. For each of the taxes below, indicate whether you think the tax burden will be borne primarily by consumers or producers. Also, how successful do you think each tax will be in raising revenues?

a) A city tax on the use of paper bags in supermarkets. Consumers have the option of asking for plastic bags or bringing their own bags.

b) An increase in the national gasoline tax.

c) A tax on paper copies of textbooks when online versions of the books are available. Discuss why students’ preferences (i.e., whether they are willing to use online texts) are important in determining the effect of the tax.

Answer 1

A. A city tax on the use of paper bags will induce consumers to bring their own bags when they shop from supermarkets. This is because for a middle income consumer, this tax on paper bags will have an impact on their budget. They would therefore prefer to carry bags at all times so that they won't have to pay extra for the bags. The burden primarily falls on the consumer. The extent to which revenue can be successfully raised by the government is less. This is why it will not be very successful in raising revenue.

B. An increase in the gasoline tax will make it expensive. The tax adds on to the price of gasoline and leads to an increase in the price. This will reduce the consumption of gasoline. People would switch to public transport. The burden is beared by the consumers and will reduce their consumption of gasoline. But to the extent that it is not possible to completely avoid gasoline consumption, it will increase the revenue for the government.

C. A tax on paper copies of textbooks will increase the revenue of the government. The tax burden of the products can be passed on to the consumers. This is because some students would have strong preference for textbooks. This is why they would continue buying textbooks even if a tax was imposed, which would lead to an increase in the revenue of the government.