When a unit tax of $0.50 is levied on a product

Question

Quizplus · Accepted Answer

When a unit tax is levied on a product, the burden of the tax is shared between the consumer and the producer. The exact amount paid by each depends on the price elasticity of demand and supply. In most cases, the consumer pays part of the tax, and the producer pays the rest. This is because the tax increases the cost of production for the producer, which may be passed on to the consumer in the form of higher prices. However, the degree to which the price is increased will depend on the elasticity of demand, and the producer may still absorb some of the tax if the demand is highly elastic. Therefore, both the consumer and producer share the burden of the tax.

When a Unit Tax of $0