The New South Wales government is considering a major change to its property tax system. Currently, a significant component of state tax revenue is generated through a "stamp duty", which is a tax on real estate transactions. The government is considering replacing the stamp duty with a land tax that will raise the same amount of tax revenue. The land tax would be an annual tax paid by the owner of a piece land, based on the land's unimproved value - that is, the value of the land itself not including any buildings or other improvements built on the land.

This question asks you to consider whether, as an economist, you would recommend the tax reform under consideration.

Part A (1 mark)

To keep things as simple as possible, in analysing the stamp duty, consider only the market for newly constructed houses. Suppose that the supply and demand for new houses are given the by the following:

Supply: P = 300 + 3Q

Demand: P = 1260 - 9Q

In these equations, P represents thousands of dollars, and Q represents thousands of new houses.

On a graph, illustrate the competitive market equilibrium in this market without any government interference.

Part B (1 mark)

Suppose that stamp duty imposed by the government was equal to $24,000 per new house and had to be paid by the seller whenever a house is sold. On your graph from part A, show how the market equilibrium is affected by the stamp duty.

Part C (2 mark)

Calculate the deadweight loss associated with the stamp duty and the buyers' tax burden.

Part D (2 marks)

Is the market equilibrium with the stamp duty Pareto efficient? Explain why or why not.

Part E (4 marks)

Now, consider the government's proposal to replace the stamp duty with an annual land tax. Assuming that land in New South Wales is in fixed supply, do you expect that the deadweight loss to be higher or lower as a result of the land tax? Would you recommend that the government adopt the land tax or keep the stamp duty? Will there be any losers from the tax reform? Explain your answers. [It may help to use a graph to illustrate your answer.]