In: Economics
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?
Buyer's Share = ES / (ES + |ED|)
= 1.2 / (1.2 + |-0.6|)
= 1.2 / 1.8
= 2 / 3
Seller's Share = |ED| / (ES + |ED|)
= 0.6 / (1.2 + |-0.6|)
= 0.6 / 1.8
= 1 / 3
Thus, buyers will bear 2/3 and sellers will pay 1/3.