Senator Chelsea Smith has contracted our services to analyze the impact of a potential $7 excise tax on SUV rentals that has been recently proposed in her district. The senator is concerned about the impact the tax will have on the welfare of the rental companies in her district, as they have supported her in her recent re-election bid. Our research team has already conducted some preliminary analysis and obtained the following estimates of monthly demand and supply in the local market:
Qd=500−5P and Qs=2P−60. Currently, the average price per daily SUV rental is $80 in the local market, and 100 units on average are rented each month.
Estimate the impact the tax will likely have on the market price and quantity of SUV rentals. Also, make sure to quantify how the tax burden will be split between consumers and producers based on changes in their respective surplus areas. Depending on who is impacted most by the tax, the Senator will make up her mind to support or oppose the tax.