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Supply and Demand Analysis on Retail Sales Tax

A state has a retail sales tax of 10 percent but it exempts food, prescription drugs, and all services including housing services, repair services, and consumption of electricity and other public utility services. Use supply-and-demand analysis to explain how the prices of untaxed consumption items can be affected by the retail sales tax even though they are not subject to taxation. How can changes in the prices of non-taxed items affect the incidence of the retail sales tax?

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A state has a retail sales tax of 10 percent but it exempts food, prescription drugs, and all services including housing services, repair services, and consumption of electricity and other public utility services. Use supply-and-demand analysis to explain how the prices of untaxed consumption items can be affected by the retail sales tax even though they are not subject to taxation. How can changes in the prices of non-taxed items affect the incidence of the retail sales tax?
The imposition of 10 percent tax on retail goods has two effects. First, the tax in the retail market increases the price of the goods. The quantity demanded decreases and there is surplus in the retail market. The result is that in the long run some factors of production are freed and are available for the production of food, ...

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