Question

Suppose that Congress decides to put a tax on coal. In which of the following scenarios...

Suppose that Congress decides to put a tax on coal. In which of the following scenarios would coal producers pay a larger portion of the coal tax than consumers?

  • Price elasticity of demand = 1.3 and price elasticity of supply =1.5

  • Price elasticity of demand = 1.3 and price elasticity of supply =0.7

  • Price elasticity of demand = 0.9 and price elasticity of supply =1.5

  • Price elasticity of demand = 0.9 and price elasticity of supply =0.7

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Answer #1

Correct option - price electricity of demand = 1.3 and price elasticity of supply = 0.7.

If producer have to bear the larger portion of tax then, it's price elasticity of demand should less elastic than of consumer or it should be inelastic.

And in the above point price elasticity of demand is elastic and price elasticity of supply is inelastic. Which means there is no change in quantity supplied as price changes. Therefore larger portion of tax will be paid by producers.

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