In the market for coffee, the elasticity of demand is estimated to be –0.6 and the...

In the market for coffee, the elasticity of demand is estimated to be –0.6 and the elasticity of supply is estimated to be 1.2. If the government imposes a $1 tax on each cup of coffee sold, what share of that tax will be paid by buyers and what share will be paid by sellers?

Solutions

Expert Solution

Buyer's Share = E_S / (E_S + |E_D|)

= 1.2 / (1.2 + |-0.6|)

= 1.2 / 1.8

= 2 / 3

Seller's Share = |E_D| / (E_S + |E_D|)

= 0.6 / (1.2 + |-0.6|)

= 0.6 / 1.8

= 1 / 3

Thus, buyers will bear 2/3 and sellers will pay 1/3.

Rahul Sunny answered 1 year ago

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