Question

The following graph shows the daily market for shoes. Suppose the government institutes a tax of $46.40 per pair. This places a wedge between the price buyers pay and the price sellers receive.

050100150200250300350400450500200180160140120100806040200PRICE (Dollars per pair)QUANTITY (Pairs of shoes)Tax WedgeDemandSupply

Fill in the following table with the quantity sold, the price buyers pay, and the price sellers receive before and after the tax.

	Quantity	Price Buyers Pay	Price Sellers Receive
	(Pairs of shoes)	(Dollars per pair)	(Dollars per pair)
Before Tax
After Tax

Using the data you entered in the previous table, calculate the tax burden that falls on buyers and on sellers, respectively, and calculate the price elasticity of demand and supply over the relevant ranges using the midpoint method. Enter your results in the following table.

	Tax Burden	Elasticity
	(Dollars per pair)
Buyers
Sellers

The burden of the tax falls more heavily on the   elastic side of the market.

Answer 1

Answer: Let us assume that the total number of pairs of shoes that the seller could sell before the introduction of tax by the Government was $120 per pair and the total number of pairs sold by the seller was 200, and the total number of pairs of shoes that the seller could sell after the introduction of tax by the Government became $240 per pair and the total number of pairs sold by the seller reduced to 100. Let us show the details in the chart below:

      Quantity before tax levied   Price    Dollars per pair Quantity after tax levied     Price   Dollars per pair   

                     200                     24000            120                     100 24000             240

  

                                              Here we can see that this would further lead to a long-term loss for the seller as the total number of products sold would get reduced due to the increased price of the product.

                                                 The burden of the Tax would definitely fall on the elastic side of the market because the non-elastic side of the market would buy or not buy the shoes irrespective of the change in price of the shoes (i.e. the rich will buy the shoes even if the price increases and the poor would not buy the shoes even if the price decreases). It would therefore be the elastic middle class section of the market who would have to bear the burden of the change in the price of the product.