Question

How would the supply and or demand curve shift if a $4 tax was imposed on suppliers for each unit of caviar and regular eggs sold? With visuals please explain how the tax incidence, DWL, and welfare effects differ between the two goods and why? please explain in terms of CS, PS, DWL, revenue, elasticity, etc if possible. thank you

Answer 1

Ans) Price elasticity of demand is the responsiveness of quantity demanded to change in price. Demand for regular eggs is more elastic than caviar.

Incidence of tax means who will bear the real burden of tax, irrespective of side of imposition.

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.

Further, if government wants to raise more revenue with less welfare loss, it should tax goods with less elastic demand.

In case of regular eggs, demand is more elastic than supply. As a result, suppliers of egg will beear greater burden of tax. Further, revenue generated will be less and deadweightloss will be more.

In case of caviar, demand is less elastic. As a result, revenue generated by the government will be more and deadweightloss will be less.

So we see that taxing good with less elastic demand generates more revenue with less deadweightloss.

(Herr consumer surplus and producer surplus is less relevant. Rather deadweightloss and burden on sellers and buyers is more relevant.]