Question

Suppose the government of British Columbia has imposed a tax on homes bought by foreigners in the province. Use the partial-equilibrium tax incidence framework to analyze the impact of this tax. Who bears the burden of this tax? Who benefits from the tax? Can the tax be shifted? Explain the assumptions behind your answer.

Answer 1

We assume that supply is more elastic than demand. The result is price rises to op from oR.. Quantity demand falls from OG to OF. Burden on foriegn buyers is PQRS and on suppliers is rstu. Both bear tax but mostly by foriegn buyers. If demand is more elastic than supply then suppliers will bear more tax. Domestic consumers gain because supply of houses for them rises which will mean lower prices for them. We also assume here that it is difficult for buyers to show off themselves as domestic buyers