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Difficulty: MediumIncidence and Effects of Taxation

A specific tax of ₦50\text{₦}50 per unit is imposed on a commodity whose initial equilibrium price is ₦200\text{₦}200. Following the introduction of the tax, the market price paid by consumers rises to ₦235\text{₦}235. What percentage of the total tax burden per unit is borne by the producer?

Answer: 30 %

Answer

The producer bears 30%30\% of the total tax burden per unit.
The total per-unit specific tax is ₦50\text{₦}50. The price increase experienced by the consumer is ₦235−₦200=₦35\text{₦}235 - \text{₦}200 = \text{₦}35, which represents the consumer's tax burden per unit. The remaining portion absorbed by the seller is ₦50−₦35=₦15\text{₦}50 - \text{₦}35 = \text{₦}15. Expressed as a percentage of the total per-unit tax, the producer's incidence is 1550×100%=30%\frac{15}{50} \times 100\% = 30\%.

Step-by-Step Solution

1
Calculate the consumer's share of the unit tax.
The consumer pays an additional ₦35\text{₦}35 per unit (₦235−₦200\text{₦}235 - \text{₦}200).
The portion of tax shifted to consumers is reflected directly by the increase in the market price paid by buyers.
2
Calculate the producer's share of the unit tax.
The producer absorbs ₦15\text{₦}15 per unit (₦50−₦35\text{₦}50 - \text{₦}35).
The remainder of the per-unit tax that cannot be shifted onto consumers must be absorbed by the seller/producer.
3
Convert the producer's share into a percentage of the total tax per unit.
The producer's tax burden percentage is 30%30\%.
Dividing the producer's unit tax burden (₦15\text{₦}15) by the total tax per unit (₦50\text{₦}50) and multiplying by 100100 yields 30%30\%.

Key Concept

Tax Incidence and Shifting of Tax Burden
Estimated Time:1m 30s
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Topics

Incidence and Effects of Taxation

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