The city of Malaise is considering a 10% tax on the revenues of all hotels/motels inside the city limits. Although not completely different from hotels and motels in the nearby suburbs, the ones in Malaise have a distinct advantage in their proximity to the interesting sights and convention centers. So individuals will pay some premium to stay in Malaise rather than to stay nearby.
Furthermore, all land is used equally well by hotels/motels and other forms of business; any Malaise land not taken by a hotel/motel is readily absorbed by other forms of business. Mayor Maladroit calls you in to advise him on the incidence of such a tax. He is particularly concerned with who will bear this tax in the short run (one month) and the long run (five years).
a. What is the incidence of the tax in the short run? Answer intuitively, and use a diagram
b. What is the long-run incidence? Once again, use a diagram if possible.
c. How would your analysis in b change if hotels/motels in the suburbs were perfect substitutes for those in Malaise? What would happen to tax revenues?

  • CreatedApril 25, 2015
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