4) Your city is committed to raising $100 million for a new arena. The mayor suggests...

4) Your city is committed to raising $100 million for a new arena. The mayor suggests putting a tax on taxicab rides since out-out-towners disproportionately use taxicabs. Evaluate the wisdom of this policy decision.

Expert Solution

Soltution:-Here given statement is your city is committed to raising $100 million for a new arena. The mayor suggests putting a tax on taxicab rides since out-out-towners disproportionately use taxicabs The tax on taxicab rides shifts the supply curve up by the amount of the tax (a fixed amount if there is a fixed tax per ride).
The price of cab rides rises, passing some of the tax on to out-of-towners. However, the price rises by less than the amount of the tax, from to and not to + tax. The failure of the price to rise by the amount of the tax means that taxicab drivers pay some of the tax. If the elasticity of demand for cab rides is large enough, the cab drivers may have to pay a substantial amount of the tax. If this happens, the tax is not a good idea. Furthermore, the concept of tax fungibility suggests that even if out-of-towners do pay the majority of the tax, this revenue could be used to finance other projects in the city besides the stadium or be used to reduce other taxes paid by local residents.

Rahul Sunny answered 2 years ago

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