In 1990, George H. W. Bush proposed a tax on luxury yachts, planes, furs, etc. T
ID: 1168747 • Letter: I
Question
In 1990, George H. W. Bush proposed a tax on luxury yachts, planes, furs, etc. This idea received very little opposition, and it was signed into law. However, by 1993 Congress repealed the tax due to its large negative impact on sellers of luxury goods. In particular, yacht sales dropped by seventy percent, forcing firms to lay off thousands of workers and in some cases declare bankruptcy. What can you deduce about the elasticity of demand for yachts? Suppose the tax is in the form of a per-unit tax. How does the elasticity of demand and supply affect the burden of tax paid by consumers and producers?Explanation / Answer
a. The elasticity of demand is the percentage change in the demand due to the change in its price of the good.
Here in the case of yachts the demand for yachts has decresed drastically due to the proposed tax on yachts.
b. It will affect negatively. Since the burden of tax is ultimately borne by the consumers and suppliers face problems of reduced demand for the unit.