Draw two market pictures: one for a goods market and one for the labor market where for the labor market wage represents the market price. Show the impact of a tax on labor in this labor market, and then show the effect that this tax has on the goods markets. Explain how your picture captures the incidence of this tax on the consumers of the good. Now assume that the tax is on all labor used for producing any goods. How will your answer for this goods market change if the good is capital intensive? Also, how will the elasticity of labor supply in the entire market differ from the labor market for a single product, and how does that effect incidence?

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To illustrate the impact of a tax on labor in both the labor market and the goods market lets first start with the diagrams for each market separately then show the effects of the tax on both markets ... View the full answer