Examkin

Question

Difficulty: MediumIncidence and Effects of Taxation

A specific tax of ₦80\text{₦}80 per unit is imposed on a market commodity. The price elasticity of demand for the commodity is 0.60.6, while its price elasticity of supply is 1.41.4. What is the tax burden per unit borne by the consumer in Naira?

Answer: 56 ₦

Answer

The tax burden per unit borne by the consumer is 56 Naira.
The incidence of tax on consumers depends on relative elasticity. The formula for the consumer's burden is T×EsEd+EsT \times \frac{E_s}{E_d + E_s}. Substituting the given values gives 80×1.40.6+1.4=80×0.7=5680 \times \frac{1.4}{0.6 + 1.4} = 80 \times 0.7 = 56 Naira.

Step-by-Step Solution

1
Identify given variables and elasticity values.
Tax per unit (TT) = ₦80\text{₦}80, Price elasticity of demand (EdE_d) = 0.60.6, Price elasticity of supply (EsE_s) = 1.41.4.
These values determine the proportion of the tax burden shifted to buyers versus sellers.
2
Apply the tax incidence formula for the consumer's share.
\text{Consumer Share} = T \times \left( \frac{E_s}{E_d + E_s} \right)
Tax incidence on consumers is directly proportional to supply elasticity relative to the sum of demand and supply elasticities.
3
Compute the numerical value.
\text{Consumer Share} = 80 \times \left( \frac{1.4}{0.6 + 1.4} \right) = 80 \times 0.7 = 56
Multiplying the per-unit tax by the consumer incidence proportion yields the exact burden per unit in Naira.

Key Concept

Tax Incidence and Price Elasticity
Rate this question

Topics

Incidence and Effects of Taxation

More questions from this topic