Question

Your city is committed to raising $100 million for a new arena. The mayor suggests putting a tax on taxicab rides since out-of-towners disproportionately use taxicabs. Evaluate the wisdom of this policy decision.

Answer 1

The effect of tax on taxicab rides depends on elasticity of demand. If the elasticity is more then a amount of tax needs to be shared by the taxicab drivers which would reduce their income. If it is inelastic then the entire tax amount can be shifted on to out-of-towners without affecting the cab driver. Though taxing can generate revenue for government and reduce the disproportionate use of taxis but it would create deadweight loss which would affect the industry as well.