Sales Tax Experiment Results Analysis

Margaret Fertig

ECO 200

Professor Slaysman

4/3/2016

Sales tax experiment results analysis

First, how closely do the results in the sessions approximate the results that economic theory would predict in a perfect market (hint: think about the conditions for a perfect market - perfect knowledge, zero transactions costs and laser-like focus on maximizing profit - and try to work out how buyers and sellers would interact in such a situation).

Second, the results of the experiment show us that when the $15 tax is placed on sellers the market price goes up by only $8. What is your explanation of this result?

Third, in the last session, a $15 tax was placed on the buyers. In this session the price fell by about $4 relative to the baseline outcome in session 1. Do you think the market price would have fallen farther if the market met the conditions we have laid out for a perfect market?

Lastly, if markets were perfect, would buyers and sellers care about who has the legal responsibility for paying the tax (hint: sellers had that responsibility in the second session and buyers had that responsibility in the third)

1. In a perfect market, both the seller and the buyer would be fully and equally informed and would profit both equally and fully. The session results represent a different story. Many of the sellers would choose to not make a sale when taxes were imposed on them in order to keep a breakeven rather than taking a loss. Same would happen when the buyers were being taxed. In a perfect market, both the sellers and the buyers would get a fair deal that would benefit them both but in the sessions, the fact that some sellers and buyers had to resort to not making a deal speaks volumes to the climate of the market.
2. When the price only rose $8 dollars, it was because the sellers were making larger margins of profit before the tax was imposed and after the tax was imposed, they still had enough margin that they didn’t have to raise the price the full $15 to make up for it.
3. I think that if it had been a perfect market, the price would have fallen a full $15 because it would have to in order for the buyers and sellers to be profiting equally.
4. No, it wouldn’t matter. No one would pay attention to who had the legal responsibility to pay the tax because everyone would be walking away from every deal just as satisfied as the other. It also wouldn’t matter because prices would adjust to make up for this tax and so it would be as if it weren’t even imposed.