The full burden of a tax on a durable asset in fixed supply is borne entirely by the owners at the time the tax is imosed. Future owners remit money to government but this cost is offset by a lower purchase price.
Question
The full burden of a tax on a durable asset in fixed supply is borne entirely by the owners at the time the tax is imosed. Future owners remit money to government but this cost is offset by a lower purchase price.
Solution
This statement is explaining the concept of tax incidence, which is the analysis of the effect of a particular tax on the distribution of economic welfare. Here's a step-by-step breakdown:
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A tax on a durable asset in fixed supply is imposed: This means that the government has decided to levy a tax on an asset that is durable (it doesn't wear out quickly or its usage is spread over a long period) and its supply is fixed (it doesn't change with changes in its price).
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The full burden of the tax is borne entirely by the owners at the time the tax is imposed: This means that the people who own the asset at the time when the tax is introduced have to bear the full burden of the tax. They cannot pass on this tax to anyone else because the supply of the asset is fixed.
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Future owners remit money to the government but this cost is offset by a lower purchase price: This means that while future owners will still have to pay the tax to the government, they will not actually bear the burden of the tax. This is because the price they pay to buy the asset will be lower to reflect the tax they will have to pay. So, the burden of the tax is effectively borne by the original owners who had to sell the asset at a lower price due to the tax.
In conclusion, the statement is saying that for durable assets in fixed supply, the burden of a tax falls on the owners at the time the tax is imposed, and not on future owners.
Similar Questions
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Which statement is true?Group of answer choicesThe economic incidence of taxation falls more heavily on the more inelastic side of the market.In general the burden of the tax falls on the more elastic side of the marketIn general the burden of the tax falls on the side of the market who is legally responsible for paying the tax.The economic incidence of taxation falls fully on the sellers if supply is perfectly elastic and/or if demand is perfectly inelastic.None of the statements are true.
Consider a market in which the law of demand hold, but supply is perfectly inelastic. The government levies a tax on consumers of t per unit consumed. In this case Group of answer choicesConsumer and suppliers share the incidence of the tax; the DWL is increasing in the price elasticity of demand.Consumer and supplier share the incidence of the tax; there is no DWL.Suppliers pay for part of the tax; the DWL is increasing in the price elasticity of demand.Suppliers pay for all of the tax; the DWL is zero.None of the above.
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