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Taxpayer sells a factory building for $300,000. The building was purchased in 1985 for $200,000.What is the taxpayer's gain or loss on the sale of the building?

User NikT
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Final answer:

The taxpayer's gain on the sale of the factory building is $100,000. Economic profit is the firm's accounting profit minus the $30,000 rental value of the land. Townspeople could spend up to $3 million to support a beneficial tax, while factory owners might spend just under $1 million to resist it.

Step-by-step explanation:

The taxpayer's gain on the sale of the factory building can be calculated by subtracting the original purchase price from the selling price. The purchase price in 1985 was $200,000, and the selling price is $300,000. Therefore, the gain on the sale is $300,000 - $200,000 = $100,000.

Regarding the economic profit from Exercise 7.1, economic profit takes into account not just accounting profit but also opportunity costs, such as the potential rental income from the land on which the factory sits. If the firm owns land that could be rented out for $30,000 per year, this amount should be subtracted from the firm's accounting profit to determine the economic profit. Assuming the firm's accounting profit was calculated prior to considering the opportunity cost of the land, the economic profit would be the accounting profit minus the $30,000 opportunity cost.

In the scenario where a tax on carbon emissions could benefit each resident of a small town by $300 and reduce the profits of factories by $1 million each, the factory owners may theoretically spend just under $1 million to deter the tax to avoid the cost to their profits. Similarly, the townspeople may collectively spend up to $3 million (10,000 residents x $300 benefit per resident) to support the tax. However, due to various real-world factors such as imperfect information, transaction costs, and lack of coordination, achieving the optimal spending by each group is unlikely.

User SikanderBabwani
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