Is it likely that a $2 per unit tax on the suppliers of a product will...

Is it likely that a $2 per unit tax on the suppliers of a product will increase the price by $2? Why or why not? Can you draw a diagram to support your answer?

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Expert Solution

The burden of the tax is depended on the price elasticity of demand and supply , if the supply is more more elastic the consumers bear the most of the tax burden and if the demand is more elastic the producers bear most of the tax burden.

In the case of the perfectly elastic supply , the consumers bear the full cost of taxation and if the demand is perfectly elastic the producers bear the full cost of the taxation.

Ans: Yes, it is likely that a $ per unit tax on producers of a product will increase the price by $ , in the case the there would be a perfectly elastic supply and the buyers bear the full cost of the tax. This is shown by the below graph.

The initial position at point E with no tax and when the government imposes the tax on suppliers the supply curve shifts back by the same amount. The price has increased by the same amount , this is because here the supply is perfectly elastic. The full cost of the tax falls on consumers.

Rahul Sunny answered 11 months ago

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