Question

In: Economics

Suppose that the government imposes a $1 tax on a good that currently sells for a...

Suppose that the government imposes a $1 tax on a good that currently sells for a price of $5. Also, assume that after the tax is imposed, the good sells for $5.60. Which statement best explains the effect this has on the tax burden?

a. The tax burden is being passed on to buyers.
b. The tax burden is being carried by sellers.
c. The tax burden is being shared between buyers and sellers.
d. The tax burden is precisely allocated between workers and employers.

Solutions

Expert Solution

c. The tax burden is being shared between buyers and sellers.

Before tax-

Buyers used to pay $5 for the good and Sellers used to get $5 directly from buyers.

After tax-

Buyers are paying $5.6, so they are paying $0.6 more.

Sellers will get $4.6(=$5.6-$1) because out of $5.6, $1 will go to the government in form of tax.

So now sellers are getting $4.6, which is $0.4 less than before the tax.

So both are sharing the tax. Out of $1, sellers are paying $0.4 and buyers are paying $0.6 for tax.

Rahul Sunny answered 2 years ago
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