COST AND BENEFIT Suppose that the government is considering charging a tax on ea

Question

COST AND BENEFIT

Suppose that the government is considering charging a tax on each movie ticket purchased. As a result, fewer movie tickets are purchased. This, in turn, affects many secondary markets. For example, people purchase less pop corn, but rent more movie videos. Under what circumstances can all the welfare effects of the tax be fully measured in the primary market (that is, the market for movies) that is directly affected by the tax? Explain. Under what circumstances is it also necessary to measure the effects of the tax in secondary markets that are indirectly affected by the intervention? Explain

Explanation / Answer

The tax on movie tickets measure its direct and indirect impacts on both primary and secondary markets . The primary market bears direct impact because taxes are imposed on them bourne by the customers .The loss in welfare is rise in prices by the sellers , the deadweight loss happens when customers reduce their purchases and the tickets go into losses . The next impact is fall of complementary markets like popcorn shops but a rise in substitutes like movie video market . The effect of taxes also depends upon the nature of maket ,closely related markets also fall under the welfare impacts of heavy taxations and substitutes will benefit by recieving a shift in the demand for their goods .

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