Analysis of Two Proposals to Reduce SUV Sales in the Economy

INTRODUCTION TO ECONOMICS
REGISTRATION NUMBER:
CLASS TEACHER’S NAME (if you remember it):
Question 1
In the present situation, the government is considering two situations i.e either to charge
specific taxed on the vehicle which shall depend on the quantity sold. Thus, if the quantity
exceeds a particular limit, additional tax shall be imposed or setting a price floor to reduce the
sale of SUVs in the economy. Both the propositions have been analysed here-in-below:
Proposal 1: Introducing a Specific Tax on Suppliers
For ascertaining the impact of introducing specific tax in supplier, it has been assumed that
market is in equilibrium. Further, under this type of tax the tax bill is not dependent in price
rather the same is driven by the quantity sold. Further, the concept assumes that the same is
paid by supplier. Thus, the burden shall fall on the seller resulting in the price paid by
customer shall not be equal to the receipt of seller. The receipt of seller shall be presented as
follows:
Ps =PD – Specific Tax
Where Ps = the Price received by seller
PD = the Price paid by buyer.
To analyse the impact of the same on the equilibrium demand and supply, one needs to see
the situation before introduction and post introduction of taxes:
Initial equilibrium situation before taxes
P*= (a-c)/(b+d)
Wherein QD = a-bP and QS = c+ dP
Q*= (ad+bc)/(b+d)
Wherein QD = a-bP and QS = c+ dP
Equilibrium situation after taxes
QD = a-bPD
QS = c+ dPS
P*D =P* +dt/(b+d)
P*S = P*- dt/(b+d)
Q*D =Q*-bdt/(b+d)

The above results in lowering of equilibrium and shifting of supply curve to the left resulting
in the following situation:
(a) Lower Quantity Demanded;
(b) Higher Price paid by Buyer;
(c) Lower amount received by supplier reducing profit.
The graph of burden on buyer and seller has been presented below:
Right hand side Q* represents original equilibrium and left hand side equilibrium post tax.
Further, supply curve to the left is the curve post tax and demand curve remains intact
resulting in lower quantity sold at higher price.
Under the above graph, A represents, the tax burden of producers and B represents the tax
burden of consumer. The burden of consumer shall increase if seller pass on the tax based on
elasticity of demand.
The advantage of introducing the above proposition is the purpose of reducing the demand is
achieved along with tax revenue which shall increase on account of higher taxes provided the
decrease in tax on account of reduced quantity offsets it.
The impact of the above method shall best be justified when both the above advantages stated
are crystallised. However, the method is characterised by deadweight loss as sum total of
producer and consumer surplus is reduced.
Proposal 2: Introducing Price floor
The second method that government can think of is imposing price floor. Price floor can be
defined as the lowest legal price at which goods can be sold. It restricts the price of a product
to fall below a particular level and is generally used for wage market so as to prevent from
labour pay falling below a particular level. In the present situation, the impact of introducing
price floor has been discussed here-in-under: