Question

You produce Coco cola beverages. You estimate that the price elasticity of demand for your product is 2.7 (in absolute value). Coco cola currently sells for $2.50 per 20-ounce can. Some legislators are considering placing a $1.00 per can tax on your product.(the answer should be a few words)

1-The DWL will be relatively

2-Tax revenue will be relatively

3-Given the price elasticity of demand, your burden of the tax is likely to be relatively

Answer 1

1. The DWL will be higher. As product is relatively elastic as e > 1, hence demand of beverage will fall leading derease in sales and a wider gap in supply and demand curve thus decreasing social benefits and increasing DWL.

2. Tax revenue will be relatively less. As product is relatively elastic thus when tax is levied sales will fall leading to relatively lower tax revenue.

3.As product demand is elastic hence sales will fall heavily when tax is levied (price of product increase). Hence burden of tax is likely to fall more on producers rather on consumers.