Question

Suppose that ground coffee retails for $14 per pound. On average, coffee bean producers in Central America receive $4 for the coffee beans in a pound of ground coffee. Suppose we are in the very short run, with a fixed supply of coffee beans available for sale to US processors. Further suppose that the market for coffee and for coffee beans is competitive. Now suppose that coffee processing costs rise by 50 cents a pound (via a tax of 50 cents a pound imposed on processors). What will happen to the retail price of ground coffee? To the price of coffee beans?

Answer 1

When processing cost increases by imposing tax on processor of coffee beans then price of coffee beans will increase along with retail price of ground coffee. Price will increase because we know that supply of coffee beans is fixed so there will be no change in the supply of coffee beans but because the producers has to pay taxes, they will add taxes in the selling price of coffee beans and will sell coffee beans at high prices (inclusive of tax) to the retailers so that they can produce coffee. Producers will increase price of coffee beans because of additional tax that they have to pay and retailers will increase price of ground coffee because they are buying coffee beans at an increased price from the producers.

So ultimately the burden or tax will fall on consumers.