Micro quiz 6

Refer to Figure 6-25. How much tax revenue does this tax generate for the government?

$150

Suppose that the government needs to raise tax revenue. A politician suggests that the government place a tax on food because everyone must eat and, thus, a food tax would surely raise a great deal of tax revenue. However, because the poor spend a large proportion of their income on food, the tax should be collected only from the sellers of food (grocery stores) and not from the buyers of food. The politician argues that this type of tax would place the burden of the tax on corporate grocery store chains and not on poor consumers.

No. The tax burden is determined by the elasticity of supply and demand. The burden of a tax falls most heavily on the side of the market that is less elastic. That is, the burden is on the side of the market least willing to leave the market when the price moves unfavorably. The burden will fall most heavily on the buyers of food regardless of whether the tax is collected from the buyers or the sellers. Food is a necessity, and therefore, the demand for food is relatively inelastic. When the price rises due to the tax, people still must eat. Grocery chains can sell another product lines when the price they receive for food falls due to the tax.

Refer to Table 6-2. A price floor set at $20 will

be binding and will result in a surplus of 125 units

If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars would

decrease by less than $500.

Refer to Figure 6-30. In which market will the majority of the tax burden fall on buyers?

the market shown in panel (b).