Question

In 2013, the city of Cologne, Germany, instituted a “pleasure tax.” Among other things, the tax applied to massage parlors, table-dancing clubs, and brothels. Many sex workers complained that the tax was unjust because it was levied on them rather than the men who patronize their services. One sex worker said, “I can't increase what I charge” to make up for the tax increase.

1. Is the assumption that the sex worker cannot increase what is charged realistic? What does it imply for the elasticity of demand and the incidence of this tax in a partial equilibrium framework?

2. Is the change in consumer surplus as a result of this tax greater than or smaller than the change in producer surplus?

3. What would be the difference in tax incidence on sex workers if the tax were instead levied on their patrons?

Answer 1

I think it is not realistic. It will imply elasticity of demand is very high. Its incidence will be then on Sex workers only. But as I said it us highly unrealistic. Their patrons are not so much sensitive to price

2 Here change in producer surplus is more I. E it reduces more than consumer surplus

3 it will depend on elasticity of demand and supply. Greater the elasticity of demand greater the incidence on Sex workers. Greater the elasticity of supply lesser the incidence on Sex workers