If government imposes a tax of 8% on luxury cars that the consumer must pay, why...

If government imposes a tax of 8% on luxury cars that the consumer must pay, why does the consumer not actually pay the full 8%? How is it determined how much the consumer will pay and how much the producer will pay? Is it possible for an 8% tax the government imposes on the consumer to actually have 1% paid by the consumer and 7% by the producer? Why or why not?

Solutions

Expert Solution

Consumers do not pay the entire tax because the demand and supply are not perfectly elastic or inelastic. If consumers are paying the entire tax then either the demand should be perfectly inelastic or the supply should be perfectly elastic

in case of luxury cars the demand is generally elastic which means the tax is shared between buyers and sellers. The incidence of tax is determined by the elasticity of demand and supply. Generally the more inelastic side of the market bears a greater burden of tax. this implies that if demand is highly inelastic relative to supply then consumers will bear a greater tax burden

This is possible in case the demand is fairly elastic and the supply is highly inelastic so that suppliers are bearing a greater burden of tax.

Rahul Sunny answered 2 years ago

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