A consumer values a car at $525,000 and a producer values the same car at $500,000....

A consumer values a car at $525,000 and a producer values the same car at $500,000. If a sales tax of 20% is placed on the seller (so that the seller must take the money she receives from the buyer and pay 20% of the sale price to the government), will any sale be made? What if no sales tax were imposed by government?

Expert Solution

Consumers value car $ 525,000

Sellers value car $ 500,000

Sales tax = 20%

Sales tax is levied on sellers. Thus, after tax cost of car = 500,000×1.2 = $ 600,000

Since, the consumers willingness to pay is less than after tax cost of car. Thus, sale would not happen.

No sales will be made after 2020.

When no tax was charged then the buyers will buy at $ 525,000 and sellers would sell at $ 500,000. Hence the sale would happen.

Rahul Sunny answered 2 years ago

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