Question

draw a diagram that illustrates the effect of the luxury tax in the yacht market. (i already did this, i think the supply curve just shifts the left?)

1. why has the tax raised so little revenue? hint: what is it about either supply or demand that has resulted in the tax generating very little tax revenue? as part of your answer, use your diagram to indicate the total tax revenue raised by the tax.

2. based on your answer to the previous question, would you expect this to create a lot of deadweight loss, or only a little deadweight loss? as part of your answer, indicate the deadweight loss from the tax in your diagram.

3. "tax has contributed to the general devestation of the American boating industry." explain why you think this is true (explain why you think the tax has been very damaging to yacht builders). hint: what is it about either supply or demand for yachts that has made this tax so damaging to to yacht builders?

Answer 1

Ans) Central idea÷ if government wants to raise more revenue with less deadweightloss, it should tax a good with less elastic demand.

Yacht is a luxury good. Therefore, it has elastic demand. When government imposes tax on the good with elastic demand, revenue raised by the government is less and deadweightloss is more. It is because people alter their demand significantly when tax imposition raises the price.

1) Tax revenue is less because demand is more elastic.

2) Deadweightloss (DWL) is more because people have reduced their demand significantly.

3) Tax has created devastation of boating industry because as demand is more elastic than supply, burden of tax is falling more upon the sellers. Further, due to tax, sales of boats has reduced a lot, leading to devastation of sellers.