Assignment 4_ Analyzing Elasticity and Luxury Tax Implications | Microeconomics | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

Assignment 4
1. How can you use the theory of "Supply, Demand- and
elasticity " to explain the case (by using graphs)?
a. assumption that demand for luxury goods is inelastic Price New supply curve Demand Tax 10% Intitial supply P2 P2 Customer’s tax incidence Pe Producer’s tax P1 incidence Q2 Q1 Quantity -
The demand for luxury goods is inelastic so the demand curve is steep -
When the supply curve shifts up (because of tax), the equilibrium
price rises largely so the demand for this goods decreases. As a
result, the equilibrium quantity fall down a little (because the demand is inelasticity) -
Because of the inelastic demand, the buyers must pay for tax
more than the producers (as we can see in the graph) - E d
p < 1=> when price rises, the total revenue also rises
 The government would benefit from this situation and raises money for the states budget.
b. If the demand for these luxury goods was reasonable elastic -
The demand for luxury goods is elastic so the demand curve is flat -
Because of the elasticity demand so the equilibrium quantity
decreases dramatically whent the price rises slightly. Price -
Edp>1 so when the price rises, the total revenue decreases. the
buyers must pay for tax less th Demand an the produc New supply curve ers (as we can see in the graph) - Tax 10% Intitial supply P2 Customer’s tax Pe incidence P1 Q2 Q1 Quantity -
People tend to buy substitute products to avoid paying tax. The
burden of this tax ended up falling on the workers and retailers
who manufacture and sell these luxury goods. This causes the
major fall in supply so the government has to support the
producers to maintain the supply source and government will
lose more money than they gain from the luxury tax which
means the purpose of the tax has failed
2. What is implication for the Government in the tax policy ? -
the luxury tax would mostly affect people from the upper class, causing them to
pay an extra cost for a luxury product, but not people from lower classes.
However, in fact the elasticity of demand makes the purpose of tax has failed. To
some extent, is also shows that the government tax is not appropriate. -
the Congress adopted a 10% luxury tax which is an inappropriate
tax. This lead to the loss of the money in the government and fall
of the supply quantity, making this kind of policy detrimental to
the entire money. The Congress should have put lower tax like 5
% or put 10% tax in some states as a trial and then analyzed the result to make next move. -
And the government could also have additional measures to avoid negative effect of the taxation, such as: o Anti –dumping o
Raising the import duty to prevent consumers form buying the
substitution products with lower or no taxes o
setting import quota on certain luxury goods to benefit local producers and workers Producer’s tax incidence