Assignment:
State and Local Finance
1. Suppose that the local legislative body in Your College Town (YCT) decides to levy a tax of $.50 for each 12 ounces of beer sold in the city (both by the drink and packages). The city sees the tax a s way to have students pay more for the city services they receive.
Suppose that the beer market in YCT is competitive, the long-run industry supply in YCT is perfectly elastic, and the demand for beer in YCT is very price elastic.
a. What will the effect of the tax be on the price of beer in YCT, the amount of beer sold and the number of beer stores and bars in YCT?
b. Why might the demand for beer in YCT be so price elastic, given that it is known that overall demand for beer is rather inelastic? In view of that, what do you expect the effect on the tax will be on beer sales and the number of stores and bars in surrounding cities?
2. Under what conditions would it be possible for an excise tax to have no efficiency cost and, in fact increase economic efficiency? Show this graphically. Support your answer with an example.