Question

Question 01: Answer both A and B.

(A):    Explain Incidence of Taxation and its impact on market efficiency. How the tax burden is shared between buyers and sellers?

.

(B): Keeping in view the demand –supply analysis, how the following events will affect the prices and quantities/output in the market? (Answers must be supported by a neat and clean diagram):                                                       

  

If government imposes 5% custom duty on the import of spare parts in the automobile sector;

If government announces to introduce value added tax (VAT) in the white goods sector.

Answer 1

a)

Impact of taxation refers to the immediate burden of tax after its imposition. while incidence of tax refers the final burden of tax. Impact and incidence could be different for a tax. How much tax is differed to buyers depends on the elasticity of demand and supply.

If demand is elastic and supply is inelastic, more burden shall be on seller of commodity. Conversely, if demand happens to be more inelastic and supply more elastic, then more tax burden shall be borne by buyer.

b)

Imposition of tax on spare parts shall increase cost of supply, hence supply shall shifts to left and elasticity of demand and supply shall decide actual distribution of tax between buyer and seller: