Question

The government is considering imposing taxes on the sellers of certain classes of products. The first tax they are considering is a tax on 2% milk. The second is a tax on all dairy products. The third is a tax on all food products. Which of these three taxes would you expect to have the largest impact on the sticker prices of the taxed products?

Answer 1

In this question, action on the food products would have the highest impact on sticker prices. This is because the demand for two percent milk is quite elastic and there are many substitutes available for it and therefore if the sticker price increases consumers try to buy the substitute and therefore the burden is actually taken by the producers itself here. The demand for dairy products is not as elastic as 2% milk but it is somewhat elastic because of the substance available such as soil milk peanut butter etc. Therefore here also sticker prices might not increase because of the elastic nature. Since, food is actually necessary good and it is highly inelastic increase in the tax can get to burden the customers where he the sticker prices increase a lot.