Suppose the government establishes a per-unit tax on new car sales. The tax funds will be directed to a new pollution abatement program. Consumers in this market watch the price of cars carefully, since a car purchase represents a significant percentage of consumers’ incomes. On the supply side of the market, the car manufacturers use highly specialized equipment and production processes to produce cars, and find it relatively difficult and costly to quickly move into the production of alternative consumer products. Based on this information above, determine which side of the market (demand or supply) is more price elastic. Make a sketch of the demand and supply in this market, in which the relative slopes reflect the relative elasticities you have noted. On your graph, show the impact of the tax on this market, with your graph showing clearly who will bear the greater percentage of a car tax burden, consumers or producers. (Assume that the sellers make the tax payments to the government.)
Suppose the government establishes a per-unit tax on new car sales. The tax funds will be directed to a new pollution abatement program. Consumers in this market watch the price of cars carefully, since a car purchase represents a significant percentage of consumers’ incomes. On the supply side of the market, the car manufacturers use highly specialized equipment and production processes to produce cars, and find it relatively difficult and costly to quickly move into the production of alternative consumer products.
Based on this information above, determine which side of the market (
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