3. Using the price elasticity of demand as discussed in Q2a, assume the governme

Question

3. Using the price elasticity of demand as discussed in Q2a, assume the government imposed a tax on prawns. Explain who will bear most of the burden of tax on prawns. Illustrate your conclusion using an appropriate economic model. Hint: In your answer, make reference to the concepts of consumer and producer surplus. (250-300 words)

Here is Q2a (FOR REFERENCE) Using the determinants of price elasticity of demand, discuss whether you think the price elasticity of demand for prawns to be inelastic or elastic?

NEWS ARTICLE
A TRAWLER arrived in Mackay Tuesday morning laden with tiger prawns - just in time for the Easter rush - but scenes like this are becoming rare. Commercial operator and owner of Mackay Fish Market, David Caracciolo, said fresh seafood lovers were lucky the trawler was nearby with about 500kg of fresh and two tonnes of frozen prawns from the Repulse Bay and Brampton Island areas on board. "The fresh will definitely be sold (this Easter)," Mr Caracciolo said. "(But) My personal opinion is that we won't see fresh seafood in the next 10 years," he said. "Australia has gone totally over the top with its rules and regulations. "We are the third biggest water mass in the world, but we have the smallest fishing fleet." Mr Caracciolo said only 200 prawn trawlers were operating along the Queensland coast. "A lot of them have had enough... they are sick of fighting the rules and regulations that different authorities impose," he said. "They think they are ocean-going 'coal' boats but they are just small operators." Skipper Dave Coulter left Mooloolaba bound for Mackay about nine days ago. "We make the same as we did 20 years ago," he said. And while prices for catches were the same, costs for trawler operators had skyrocketed, Mr Coulter said.

Explanation / Answer

To understanding of this concepts, some products are very elastic and some products are not much elastic. It depends on the availability of goods and the time considerations.

Let’s taken an example if the price of the car will increase from 10 to 20% then people will reluctant to buy on the other hand if the price of the salt will increase 10 to 20% the people will still buy because it is the essentials goods and not depends on the magnitude of price.

Now to determine the price of good and elasticity of demand, there the good should be availability of close substitute, there should be product cost in one budgets, period of time considerations, etc. all this factors determine the elasticity of demand.

Thus, according to the examples given above that the tiger prawns which is one of the rare goods in the world and it does not find in any particular place or ocean, then people or the consumer will want to buy and wanted to take if there is increase in cost of that particular goods, on the other hand even if the price of the Prawns will increase like the increase in fish still the consumer will buy that commodity, and it associated that the elasticity demand of this commodity is less elastic

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