Question

Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

Answer 1

Answer:

The amount of the $1 tax that is paid by sellers is $0.40.

Explanation:

The amount of tax paid by the sellers can be calculated using the following 2 steps:

Step 1: Calculation of the tax burden of the seller

This can be calculated using the following formula:

Tax burden of the seller = Elasticity of demand / (Elasticity of demand + Elasticity of supply) ............... (1)

Where;

Tax burden of the seller = ?

Elasticity of demand = 2

Elasticity of supply = 3

Substituting the values into equation (1), we have:

Tax burden of the seller = 2 / (2 + 3) = 2 / 5 = 0.40, or 40%

Step 2: Calculation of the amount of the $1 tax that is paid by sellers

This can be calculated using the following formula:

Tax paid by the sellers = Tax amount * Tax burden of the seller .................. (2)

Where;

Tax amount = $1

Tax burden of the seller = 40%

Substituting the values into equation (2), we have:

Tax paid by the sellers = $1 * 40% = $0.40

Therefore, the amount of the $1 tax that is paid by sellers is $0.40.

Additional note:

The answer above clearly demonstrates what obtains in economics that when supply is more elastic than demand, sellers will bear less of the tax burden, and when demand is more elastic than supply, sellers will bear more of the tax burden.

From the question, the fact that the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value) indicates that supply is more elastic than demand. This makes the sellers to bear only 40% of the tax burden while the buyers bear the remaining 60%.