Suppose that the demand for vegetables is very elastic (elasticity = -5) and sup

Question

Suppose that the demand for vegetables is very elastic (elasticity = -5) and supply is unitary elastic (elasticity = 1). The government has imposed a sales tax on the purchase of all goods and services. also government deciced to impose an additional $2 per vegetables tax on the producers of vegetables which is paid by the producer when he sells vegetables.

1. who will bear larger share of tax

2. if vegetables are inelastic, then whats the tax paid by consumers.

3. suppose government will use this revenue for other purposes. would you support or not.

Explanation / Answer

1. The larger share of tax will be borne by producers as already sales tax is levied on the purchase of all goods and services and also an additional tax of $2 is also levied upon which the proudcers has to pay when they sell, therefore the producers has to bear the larger share.

2. If the demand for vegetables is inelastic which means that the demand will not increase then the tax paid by consumers will be same as there is no increase in demand therefore supply will also be the same. thus the tax structure also remains same.

3. Suppose if the government uses this revenue for some other purpose then that is not at all acceptable because the tax collected from the sale of vegetables has to be used for that purpose only. The government should try to increase the production by helping the producers and giving good quality produces to the consumers. This revenue should be used to increased the output quality, increase farmers benefits, health etc.
Then only we can get good quality prodcuce and thereby making a healthy country.

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