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Difficulty: MediumIncidence and Effects of Taxation

A specific tax of ₦60 per unit is imposed on a commodity, causing its equilibrium price to increase from ₦150 to ₦195. What is the amount of the tax burden per unit borne by the producer?

Answer: 15 Naira

Answer

The tax burden per unit borne by the producer is ₦15.
The effective incidence of a tax depends on how much the price rises for consumers versus how much net revenue producers retain. Since the market price rises by ₦45 (from ₦150 to ₦195), consumers pay ₦45 of the tax. The producer absorbs the remaining ₦15 of the total ₦60 tax per unit.

Step-by-Step Solution

1
Determine the consumer's share of the tax burden
₦195 - ₦150 = ₦45
The portion of tax shifted to consumers is reflected directly in the market price increase.
2
Determine the producer's share of the tax burden
₦60 - ₦45 = ₦15
The total tax per unit is split between the consumer and producer; subtracting the consumer's burden gives the producer's burden.

Key Concept

Incidence of Taxation and Share of Tax Burden
Estimated Time:1m 0s
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Topics

Incidence and Effects of Taxation

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