Consider a three dollar excise tax. If the original price was $10 and both the supplier...

Consider a three dollar excise tax. If the original price was $10 and both the supplier and consumer have unit elastic curves then Pb= and Ps=

Expert Solution

Tax burden falls on both sides of the market but which side bears the tax burden the most, that depends on the elasticity. Tax burden falls heavily on the inelastic portion of the market. If both demand and supply are unit elastic, then tax burden falls equally on buyers and sellers. Therefore, buyers will pay $1.5 of the $3 excise tax and sellers will pay $1.5 of the $3 tax. If the original price is $10, then after tax buyers pay = Pb = $(10+1.5) = $11.5 but sellers receive (Ps) = $(10 - 1.5) = $8.5

Tax = Pb - Ps

Answer: Pb = $11.5 and Ps = $8.5

Rahul Sunny answered 2 years ago

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