Suppose the government applies a specific tax to a good where the demand elasticity, e, is-04,...

Question

Question

business economics

Answer 1

Answer #1

Given,

Demand Elasticity = 0.4 , Supply Elasticity = 0.8, Specific Tax = $1.25

The tax will be divided between the consumer and producer according to the demand and supply elasticity.

The fraction of the tax paid by the Consumer = Supply elasticity / (Demand elasticity + Supply Elasticity) = 0.8/ 0.4+0.8 = 0.8/1.2

=2/3

The fraction of the tax paid by the Producer = Demand elasticity / (Demand elasticity + Supply Elasticity) = 0.4/0.4+0.8= 0.4/1.2

=1/3

Tax paid by consumer = 2/3 *1.25 = $0.833 , Tax paid by producer = 1/3 * 1.25 = $0.417

The price paid by consumer would increase by $0.833.

The amount received by producers would decrease by $0.417.

The tax incidence on the consumer is 66.67% i.e. 2/3.

Answer 2

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