Question

It is frequently asserted that taxes on cigarettes beer are regressive, because poor
individuals spend a larger fraction of their income on such items than do better-off
individuals. How would your estimate of the degree of regressivity be affected if you
thought these commodities were produced by?:
a. Competitive industries with inelastic supply schedules?
b. Monopoly with a linear demand schedule?
c. Monopoly facing a constant elasticity demand schedule?

Answer 1

ANSWER: Generally, the regression taxation decreases the burden to the people with high capability to pay and shift is relatively to those with the lower ability to pay.

a) The competitive industry with the inelastic supply indicates that the producers are not changing the supply with the change in level of prices in the market, which means beer and cigrattes are being sold in competitive market, the degree of regressivity will be higher here for the poor because the competitive price will be more uniform than the other market structure.

b) Monopoly with the linear demand schedule means that more can be sold by a monopolist only by reducing the prices, so the degree of the regressiveness will be low because in the monopoly market they will not spend a large fraction of their income for purchasing their products.

c) Once the demand stays constant without any change, then they will have higher regressive taxation because they adjust their demand in the monopoly market and still spend more on these goods from their small share of income.

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