Final answer:
When the government imposes a new tax on goods or services, it acts as a negative incentive, leading to reduced consumer demand for those goods, especially when the demand is elastic. For sellers with inelastic supply, such as beachfront hotels, taxes lead to lower profits without much change in the quantity supplied.
Step-by-step explanation:
If the government imposes a new tax on a particular good or service, many consumers would buy less of it; this is an example of a negative incentive. When discussing economic incentives, a negative incentive is anything that discourages people from doing something — in this case, the additional tax makes purchasing the good less attractive, leading to a decrease in demand. Economic theory suggests that when the demand is elastic, as with beachfront hotels where consumers have many vacation choices, a new tax will cause a significant decrease in the quantity demanded because consumers will be more responsive to the price change. Similarly, for sellers with inelastic supply, such as beachfront hotels which cannot be easily relocated, the tax burden is largely absorbed by the sellers, resulting in lower profits rather than large changes in the quantity supplied. Figure 5.10 provides a visual of this economic concept by showing the wedge between the price consumers pay and the price producers receive due to the tax.