Suppose that the government places a tax of $5 per tyre on the buyers of automobile tyres.
i. Use a supply-demand diagram to show the effect of the tax on the tyre market and the incidence of taxation on buyers and sellers. (6 Marks)
ii. Now suppose that the government switches to a tax of $5 per tyre on the sellers of automobile tyres. Use a second supply-demand diagram to show the effects of this tax on the tyre market and the incidence of taxation on buyers and sellers. (6 Marks)
iii. Can you say anything about the relative effects of the two alternative taxes on the tyre market and on the incidence of taxation? (Assume that the market equilibrium price before tax incidence was $25). Support your answer with diagram(s). (3 Marks)
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