Question

1. The city of Regina wants to increase their revenues. Some alternatives are being discussed in the city Council. The city asks you for your advice knowing of your knowledge in microeconomics. The alternative with more support is the implementation of a tax on food delivery (assume that this tax adopts the form of an excise tax, which is a fixed value in dollars per unit sold; for instance $4 dollars per delivery). The Council knows that demand for food delivery has increased during the pandemic and wants to take advantage of this for revenue purposes. However, some questions in the Council remains unanswered and they want your help to understand the potential implications of this policy.

1. The Council has not decided whether to charge the tax on buyers or sellers. Assuming that the market for food delivery shows normal conditions (like the markets in the lectures), what would your recommendation be? Show it graphically.

2. The Council does not know much about the demand for food delivery. You identify this as a problem and decide to present two cases for the Council to consider: 5.2.1) the case of an elastic demand, and 5.2.2) the case of an inelastic demand. What can you teach the Council by introducing these two cases into the discussion? Show it graphically.

3. What can we learn from the two cases in 5.2 in relation to the revenues collected for the city? What would your suggestion be?

Suppose the Council knowing that the demand for food delivery has steadily increased during the last months (and assuming that this pattern will continue for at least two more years) decides to put on the discussion table the option of a large tax rate (i.e., size of the tax). This idea makes you nervous because you know that the purpose of the tax is to increase the city’s revenues. Why would you be nervous? (Hint: show graphically the effect of three different tax sizes and consider market conditions like those in 5.1).

Answer 1