In 2004, the city of Cologne, Germany, instituted a “pleasure tax.” Among other things, the tax applied to massage parlours, table-dancing clubs, and brothels. Many sex workers complained that the tax was unjust because it was levied on them rather than the men who patronize their services. One sex worker said, “I can’t increase what I charge” to make up for the tax increase.
a. Implicit in the sex worker’s assertion is an assumption about the elasticity of demand for her services. What is that assumption, and do you think it is realistic?
b. What would be the economic implications for sex workers if the tax were instead levied on their patrons?