The federal government currently imposes an excise tax on air travel. That is, airlines are required...

The federal government currently imposes an excise tax on air travel. That is, airlines are required to pay a tax per passenger on each flight. Suppose this tax is equal to $4.00 per passenger.

- Using the model of demand and supply shows what the market for air travel would look like without the tax. Identify on your graph the market price, the number of passengers flown, consumer surplus, and producer surplus.

- If the price elasticity of demand for air travel is less than the price elasticity of supply who will bear the greater burden of the $4.00 tax—producers or consumers?

Solutions

Expert Solution

Below is the model of demand and supply that shows the market for air travel without the tax. The market price is P0, the number of passengers flown is N0, consumer surplus is shown by area AEP0, and producer surplus is shown by area BEP0.

We know that the less elastic side of the market bears a greater burden of tax. Hence, if the price elasticity of demand for air travel is less than the price elasticity of supply then it would be the travelers who would bear the greater burden of the $4.00 tax. Thus, the answer is consumers

Rahul Sunny answered 1 year ago

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