Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1). If the incidence of the tax is such that the producers of X pay $1.90 of the tax and the consumers pay $.10, we can conclude that the

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The price elasticity of supply of X is unitary (coefficient = 1), which means that a 1% increase in price will lead to a 1% increase in quantity supplied. The incidence of the tax is such that the producers of X pay $1.90 of the tax and the consumers pay $.10, which means that the tax is mostly borne by the producers. This suggests that the supply of X is highly elastic, as the producers are able to shift the burden of the tax onto the consumers.

Suppose That Government Imposes a Specific Excise Tax on Product