Exploring Supply, Demand, and Elasticity in Tax Policy Analysis | Microeconomics | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

Nguyễn Việt Anh EBDB 3 11219329
1. How can you use the theory of "Supply, Demand- and
elasticity " to explain the case (by using graphs)?
In this case, the assumption was that the demand for these luxury goods was inelastic.
The gap between a and b in the demand curve is the 10% of tax.
The supply curve shifted up with a much smaller rise in equilibrium
price. As the demand is assumed to be inelastic, the demand curve is
steep, which leads to the large rise in equilibrium price and the relatively
small fall in equilibrium quantity.
The rich do not have response dramatically when there is a change in
price would not pay most of the tax. The costumer burden is greater than
the producer burden (P −P >P −P ). 1 E E 2
However, the demand for these luxury goods is reasonable elastic,
then the flatness of the demand curve and the upward shift and the
supply curve leads to rise in equilibrium and fall in equilibrium quantity.
The gap between a and b in the demand curve is the 10% tax.
The rich do not have response when there is a change in price
would pay most of tax. Producer burden is greater than consumer burden ¿ ¿).
According to the theory of supply, demand and elasticity, the buyer
response very dramatically when there is a change in price of these
luxury goods as they moved to buy substitute products to avoid paying
tax. The burden of tax actually ended up falling on the workers and
retailers who manufacture, sell these luxury goods -> purpose of the tax has failed.
2. What is implication for the Government in the tax policy?
The fact pints that the assumption of the elasticity of the demand
for these luxury goods is not correct. To some extent, it also shows that
the government’s tax policy is not appropriate.
The Congress adopted a 10% “luxury tax” which is an
inappropriate tax. This leads to the loss of money in the government and
the fall of the supply quantity -> making this kind of policy detrimental to entire economy.
The Congress should have put lower tax (4-5%) or put 10% tax in
some states as a trial and analysis the result to make next move.
Additional measures to avoid the negative effect of the taxation 1. Anti-dumping
2. Raising the import duty to prevent consumers from buying
the substitution products with lowers or no taxes
3. Setting import quota on certain luxury goods to benefit the local producers and workers..