The government is considering imposing taxes on the sellers of the following foo

Question

The government is considering imposing taxes on the sellers of the following food products.

1. The first tax they are considering is a $1.00 per gallon tax on 2% milk.

2. The second is a $1.00 per gallon on lactose-free milk.

Assume that responsiveness of sellers/producers of these two dairy products to price changes is the same. Also assume that the two markets are comparable in size and the two commodities have comparable per unit prices.

a. What would you expect the statutory and economic incidence of each of the two taxes to be? Explain.

b. Which of the two taxes will result in the largest deadweight loss (excess burden) relative to the market size? Explain.

Use graphical analysis techniques to aid your explanations for (a) and (b) above.

Explanation / Answer

a. with increase the tax on both kinds of milk, the cost will goes up. ultimatiley it leads to minimize the demand for the product. the economic impact is those who produce these two products, their sales will comes down and revenues also comes down. and milk is a perishable product, it can not be stored for a long time.

b. the tax on milk shows higher impact

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