Tax elasticity Suppose the government applies a specific tax to a good where the

Question

Tax elasticity

Suppose the government applies a specific tax to a good where the demand elasticity, , is-0.1, and the supply elasticity, , is 1.5 If a specific tax, , of $2.75 was placed on the good, to the nearest cent, what is the price increase that consumers would pay? $ 2.58 (round your answer to two decimal places) To the nearest cent, what is the price decrease that producers would pay? $ 0.17 (round your answer to two decimal places) What is the tax incidence on consumers? 0.94 (round your answer to two decimal places)

Explanation / Answer

Tax incidence on consumers = Es/(Es - Ed) = 0.9375 or 93.75%

Price increase paid by the consumers = 2.75 x 93.75% = $2.58 (=Tax incidence on consumers x specific tax)

Price decrease paid by the producers = 2.75 - 2.58 = $0.17

(Price decrease paid by producers + Price increase paid by consumers = specific tax)

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