Question

1. What happens in a market when taxes are imposed? How do buyers and sellers share the burden of tax?
2. Analyze the impact of Rent Control Act on the housing market. Make sure to do some external research as well.

Answer 1

Answer to the first question is provided below :

When taxes are imposed the price of the commodity increases . This causes quantity sold to fall in the market . So there is dead weight loss because of market distortion . The volume of this loss depends on the tax rate or the tax wedge .

Sharing of tax burden or the tax incidence depends upon elasticity of supply and elasticity of demand for the commodity . Let us see an example . Suppose tax is imposed on a certain medicine . Now medicines have highly inelastic demand . Whatever be the price a consumer will always try to buy medicines when he is sick . In this case the producer shifts most of the tax burden on the consumer , since the consumer's demand is inelastic in nature this raise in price due to tax will not affect demand much and thus will not reduce revenue earned by producer .