A specific indirect tax of \text{₦}50 per unit is levied on a commodity. If the price elas… — JAMB UTME

A specific indirect tax of $\text{₦}50$ per unit is levied on a commodity. If the price elasticity of demand for the commodity is $1.5$ and the price elasticity of supply is $0.5$ , how much of the tax per unit (in Naira) is borne by the producer?

Answer: 37.5 Naira

Answer

The producer bears 37.5 Naira per unit of the tax burden.

The economic incidence of a specific tax depends on the relative price elasticities of demand (

E_d

) and supply (

E_s

). The producer's share per unit is calculated as

T \times \frac{E_d}{E_d + E_s}

. Substituting

T = 50

E_d = 1.5

, and

E_s = 0.5

yields

50 \times \frac{1.5}{2.0} = 37.5

Naira.

Step-by-Step Solution

Identify the tax incidence formula for the producer's share

Formula:

\text{Producer's Burden} = T \times \left(\frac{E_d}{E_d + E_s}\right)

Tax burden distribution between buyers and sellers depends inversely on their relative price elasticities.

Substitute the values into the equation

\text{Producer's Burden} = 50 \times \left(\frac{1.5}{1.5 + 0.5}\right) = 50 \times 0.75 = 37.5

With elastic demand (

E_d = 1.5

) relative to inelastic supply (

E_s = 0.5

), the producer absorbs

75\%

of the tax.

Key Concept

Tax Incidence and Relative Elasticity of Demand and Supply

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