The residents of Rental City all own their own plot of land, but rent mobile homes. The demand for mobile homes has an elasticity of zero at 2,000 homes. The supply of mobile homes for rent is infinitely inelastic at a rate of $8,000 per year. The town council of Rental City introduces a property tax on the rental mobile homes. The tax is $1,000 per year payable by the rental company.
a) How many homes are rented after the tax is introduced? Explain. What is the gross market rent for a home after the tax is introduced? Explain. What is the net market rent of a home after the tax is introduced?
b) Given your answer to (a), what are the effects of the tax on the welfare of the mobile home absentee landlords (i.e. what happens to their producer’s surplus)? Be quantitative. Explain.
c) Given your answers to (a) and (b) what are the effects of the tax on the welfare of the residents of Rental City (i.e. what happens to their consumer surplus)?
d) Given your answers to (a), (b) and (c) is the land market efficient after the tax is imposed (i.e. is there a deadweight loss associated with the tax)? Explain.
e) On whom does the economic incidence of the tax fall? Explain.