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 OWL will be relatively ----------------------------

Tax revenue will be relatively -------------------------------------

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

Answer 1

As price elasticity of demand is 2.7 so we can say that demand is elastic. As demand is elastic so impact on tax will be less on consumer. As much as it will be elastic less burden will be on consumer and in DWL there will be less proportion to consumer.

Now when we impose$1 of tax on Coco cola then DWL will be realatively more on producer and relatively less on consumer on the condition that the demand elasticity is more than the supply elasticity. So as a producer I am going to loose more from this tax imposition given that supply elasticity is less than demand elasticity.

Tax revenue will be relatively more from supplier or producer than the consumer as demand elasticity is elastic. As demand elasticity is more than the supply the producer or seller will share more tax revenue than the consumer.

Given the price elasticity of demand the burden of tax is likely to be more on producer or seller. The burden of tax will be less on consumer given the condition that demand elasticity will be more than supply elasticity. Supply elasticity is not given here. The burden of tax on producer or seller will be {Ed/(Ed+Es)}. If Ed is more than the Es then producer's burden of tax will be more.