Answer to Question #219649 in Microeconomics for Himani

Question

BJP argues that this tax would both raise tax revenue and employment in Indian auto industry. Do you agree with this claim ? Is it a good policy ?

Answer 1

It is agreed that the tax on wine imported will raise the tax revenue for the state government. The tax on wine imports will also raise employment in the state wine industry. Tax on wine raises the price of wine. It raises the domestic quantity of wine supplied by producers. This increase in the supply of wine is possible by raising employment in the wine industry. Both the claims thus are agreed. However, it is not a good policy to impose a tax on wine imports, leading to deadweight loss. The gains of producers are moreover offset by the losses suffered by consumers due to tax.