Answer to Question #287199 in Microeconomics for anthony

Question

If the government places a P250,000 tax on luxury cars, will the price paid by consumers rise by more than P250,000, less than P250,000, or exactly P250,000?

Answer 1

If the government places a P250,000 tax on luxury cars, the price paid by consumers will rise by less than P250,000. In general, the burden of any tax is shared by both producers and consumers ${3\over4}$ the price paid by consumers rises and the price received by producers falls, with the difference between the two equal to the amount of the tax. The only exceptions would be if the supply curve were perfectly elastic or the demand curve were perfectly inelastic, in which case consumers would bear the full burden of the tax and the price paid by consumers would rise by exactly P250,000.