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Difficulty: MediumIncidence and Effects of Taxation

A specific tax of ₦15\text{₦}15 per unit is imposed on a luxury commodity. Prior to the imposition of the tax, the equilibrium market price was ₦100\text{₦}100 per unit. Following the tax, the market price paid by consumers increases to ₦109\text{₦}109 per unit. What is the amount of the unit tax borne by the producer in Naira (₦\text{₦})?

Answer: 6 ₦

Answer

The producer bears ₦6 of the ₦15 per unit tax.
Tax incidence refers to how the ultimate economic burden of a tax is divided between buyers and sellers. When a unit tax of ₦15\text{₦}15 raises the consumer price from ₦100\text{₦}100 to ₦109\text{₦}109, consumers bear ₦9\text{₦}9 of the tax burden per unit. The producer receives ₦109−₦15=₦94\text{₦}109 - \text{₦}15 = \text{₦}94 per unit after paying the tax to the government. The net price reduction for the producer is ₦100−₦94=₦6\text{₦}100 - \text{₦}94 = \text{₦}6, which represents the producer's incidence of the tax.

Step-by-Step Solution

1
Calculate the consumer's share of the tax incidence per unit.
Consumer tax share = ₦109−₦100=₦9\text{₦}109 - \text{₦}100 = \text{₦}9.
The portion of an indirect tax passed forward to consumers equals the increase in the market price paid by buyers.
2
Calculate the producer's share of the tax incidence per unit.
Producer tax share = ₦15−₦9=₦6\text{₦}15 - \text{₦}9 = \text{₦}6.
The total per-unit tax is distributed between the consumer and the producer. Deducting the consumer's share from the total tax leaves the producer's share.

Key Concept

Tax Incidence Distribution
Estimated Time:1m 30s
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Topics

Incidence and Effects of Taxation

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