Public Finance

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Your state has a retail sales tax of 10 percent but it exempts food, prescription drugs, and all services including housing services, repair services, and consumption of electricity and other public utility services. Use supply-and-demand analysis to explain how the prices of untaxed consumption items can be affected by the retail sales tax even though they are not subject to taxation. How can changes in the prices of nontaxed items affect the incidence of the retail sales tax?

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