Question

1. Consider the city of Melray Beach, Florida where lower income people work for lawn care firms that provide lawn care for the homes of higher income people. Lawn care firms charge their customers $40 per hour. They keep $25 an hour for administrative costs and pay their workers $15 per hour.

Like many luxury goods, assume the demand for lawn care services is sensitive to changes in price. Suppose the price elasticity of demand is 1.5. On the other hand, assume the supply of lawn care workers is not as responsive to changes in their wages. Suppose the price elasticity of worker supply is 0.5.

Melray Beach is considering a tax of $8 per hour (20%) on lawn care services. After all, the city reckons higher income people can afford to pay the extra $8 per hour for lawn care services.

The incidence/burden of the tax is primarily borne by (circle one):

Higher income households,

Lower income lawn care workers,

Lawn care firms.

Answer 1

Ans) Statutory incidence of tax is from whom the government collects tax. While economic incidence of tax is, who really bears the burden of tax.

When government imposes tax, it does not really matter upon whom the tax is imposed. Burden of tax is shared by both buyers and sellers. Now, who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

Here, we see that worker supply is less elastic. Therefore, lower income lawn care workers will bear greater burden of tax.