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Difficulty: MediumIncidence and Effects of Taxation

The imposition of a ₦40\text{₦}40 unit tax on cement causes the market retail price to increase from ₦4,000\text{₦}4,000 to ₦4,010\text{₦}4,010. What fraction of the tax burden is borne by the supplier?

  1. A
    14\frac{1}{4}
  2. B
    12\frac{1}{2}
  3. 34\frac{3}{4}Answer
  4. D
    11

Answer

The fraction of the tax burden borne by the supplier is 34\frac{3}{4}.
The total per-unit tax is ₦40\text{₦}40. Since the market price rises from ₦4,000\text{₦}4,000 to ₦4,010\text{₦}4,010, consumers pay an additional ₦10\text{₦}10, which corresponds to ₦10₦40=14\frac{\text{₦}10}{\text{₦}40} = \frac{1}{4} of the tax burden. The supplier must absorb the remaining portion of the tax, which is ₦40−₦10=₦30\text{₦}40 - \text{₦}10 = \text{₦}30. Expressed as a fraction of the total tax, the supplier's incidence is ₦30₦40=34\frac{\text{₦}30}{\text{₦}40} = \frac{3}{4}.

Step-by-Step Solution

1
Calculate the price increase passed on to consumers.
Price Increase=₦4,010−₦4,000=₦10\text{Price Increase} = \text{₦}4,010 - \text{₦}4,000 = \text{₦}10
The difference between the post-tax price and pre-tax price represents the consumer's portion of the tax per unit.
2
Calculate the portion of the tax absorbed by the supplier.
Supplier’s Burden=₦40−₦10=₦30\text{Supplier's Burden} = \text{₦}40 - \text{₦}10 = \text{₦}30
Subtracting the consumer's share from the total unit tax gives the net revenue loss per unit experienced by the supplier.
3
Determine the supplier's fraction of the total tax burden.
Supplier’s Share=₦30₦40=34\text{Supplier's Share} = \frac{\text{₦}30}{\text{₦}40} = \frac{3}{4}
Dividing the supplier's tax burden by the total per-unit tax yields the proportion borne by the producer/supplier.

Key Concept

Tax Incidence and Burden Sharing
Estimated Time:1m 0s
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Topics

Incidence and Effects of Taxation

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