Final answer:
The topic involves the economic principle of tax incidence and elasticity in the yacht market, where the demand is highly elastic. A luxury tax in this market would likely result in a significant decrease in quantity sold rather than a simple price increase, as consumers react to the tax by reducing purchases.
Step-by-step explanation:
The scenario provided involves elastic demand for yachts and a luxury tax implementation, which is a common subject in economics, particularly within the field of tax incidence and elasticity. Elasticity measures how responsive the quantity demanded or supplied is to a change in price. With a price elasticity of 2.5, yachts have a highly elastic demand, meaning consumers will significantly reduce their quantity demanded in response to a price increase.
According to the provided information, when the government introduces a tax, it creates a wedge between the price consumers pay (Pc) and what producers receive (Pp). This affects the market differently based on the elasticity of supply and demand. For instance, in a market with an inelastic supply and elastic demand, like beachfront hotels, consumers have a choice to go elsewhere, which severely limits sellers' ability to pass the tax onto consumers.
In the case of yachts, with such an elastic demand, a luxury tax would likely lead to a substantial decrease in the quantity of yachts sold, as consumers reduce their purchases or opt for alternatives instead of absorbing the tax. This decrease in quantity reduces the overall tax revenue the government might collect, despite the tax's intention to target luxury goods and their wealthy buyers.