Unit 6 Scenario Essay Example | Topics and Well Written Essays - 500 words

Unit 6 Scenario - Essay Example The producers would like to hike the price to P2,where the whole tax burden is borne by the visitors. But will the visitors be willing to pay for the increase in price because of tax. So the demand and supply do not match, at point P2, there is an excess supply. Hence, the price has to come down to P1, where Q1 will be both demanded and supplied. It is evident that, the price of the product for the consumer increases from Pe to P1, which is their share of tax and is about half of the tax of XY. Producers now get C per unit, after paying tax PeC per unit. The revenue for the producers falls from OPeWQe to OCYQ1. The government will receive a tax revenue equal to CP1XY and the market size falls from Qe to Q1. This may have an implication on the employment in the society as firms may employ less number of people and the visitors will also think about alternate places of entertainment due to the increase in prices. However, the tax burden on the consumers and producers will vary depending upon the price elasticity of the entertainment service. On the other hand, if the option of charging a special tax on the shop owners based on the shop size, then, the smaller shops will be at the advantageous side. Smaller shop owners will pay less taxes and so their ratio of profit to investment will be high. If the owners with bigger shops want to share the tax burden with the consumers, then the price of products from the big shops will be higher than that from smaller shops. It will create opportunities for unfair trade practices. This might discourage entrepreneurial activity and even encourage shop owners to search for better places with favorable tax climates. Hence, the option 1 of imposing indirect tax will be a better