The government is considering imposing taxes on the sellers of the following food products.
1. The first tax they are considering is a $1.00 per gallon tax on 2% milk.
2. The second is a $1.00 per gallon on lactose-free milk.
Assume that responsiveness of sellers/producers of these two dairy products to price changes is the same. Also assume that the two markets are comparable in
size and the two commodities have comparable per unit prices.
a. What would you expect the statutory and economic incidence of each of the two taxes to be? Explain.
b. Which of the two taxes will result in the largest deadweight loss (excess burden) relative to the market size? Explain.
Use graphical analysis techniques learned in class to aid your explanations for (a) and (b) above.