Scribd
Upload
141 views

Group Assignment 4

The document discusses using supply and demand graphs to explain how a tax on luxury goods would impact producers and consumers depending on whether demand for luxuries is elastic or inelastic. If demand is inelastic, the tax burden would fall mostly on consumers as the equilibrium price would rise more than the quantity. However, if demand is elastic, the tax burden would fall mostly on producers as the equilibrium price would rise less than the fall in quantity, and consumers would substitute to other goods. Ultimately, the document concludes that the government's goal of raising revenue through a luxury tax may not be achieved if demand turns out to be elastic rather than inelastic as was initially assumed.

Uploaded by

Lê Minh Thư
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
141 views

Group Assignment 4

The document discusses using supply and demand graphs to explain how a tax on luxury goods would impact producers and consumers depending on whether demand for luxuries is elastic or inelastic. If demand is inelastic, the tax burden would fall mostly on consumers as the equilibrium price would rise more than the quantity. However, if demand is elastic, the tax burden would fall mostly on producers as the equilibrium price would rise less than the fall in quantity, and consumers would substitute to other goods. Ultimately, the document concludes that the government's goal of raising revenue through a luxury tax may not be achieved if demand turns out to be elastic rather than inelastic as was initially assumed.

Uploaded by

Lê Minh Thư
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Lê Minh Thư – EBBA 12.

3
Group 3
ASSIGNMENT 4
The Surprising Elasticity of Demand for Luxuries
Question 1. How can you use the theory of "Supply, Demand- and elasticity " to
explain the case (by using graphs)?
a. The assumption was that the demand for these luxury goods was inelastic.

P Q(s)’

E’
Q(s)
P’
Costumers’ tax incident
P E
P’’ Producers’ tax incident

Q(d)

Q’ Q Q

- Assume that the demand for these luxury goods was inelastic .
- When Government taxed on luxury goods, it raised the price the total cost
of producers face in bringing a goods to market.
 The supply curve effectively shifts up.
 The equilibrium price change more than the equilibrium quantity
 The burden of tax is more on consumers than producers
b. The assumption was that the demand for these luxury goods was elastic.

P
Q(s)’

Q(s)
E’
P’
Costumers’ tax incident
P
E
P’’ Q(d)

Producers’ tax incident

Q’ Q
Q

- Assume that the demand for these luxury goods was elastic .
- When Government taxed on luxury goods, it raised the price the total cost
of producers face in bringing a goods to market.
 The supply curve effectively shifts up.
 The equilibrium price change less than the equilibrium quantity
 The burden of tax is more on producers than consumers

Question 2: What is implication for the Government in the tax policy ?

With the view to reducing the US Budget deficit, the government bring in the tax
policy. They want to raise money in the painless way by taxing on luxury goods which
is usually bought by the rich. With the assumption that the demand for luxury goods is
inelastic, then the industry supply curve shifted up in response to the new luxury tax,
the equilibrium quantity would change little while the equilibrium price would rise
much. And the extra price will be paid by the costumers – the rich.
On the other hand, in reality, the damand for luxury goods is elastic; then the upward
shift in the supply curve would lead to a much smaller rise in equilibrium price and a

lager fall in equilibrium quantity. And , the buyers moved to buy the substitution
products. Finally, the result is the extra cost will be paid by the producers.

To sum up, the government can not achieve their goal when taxing 10% on luxury
goods

You might also like