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JAMB Economics 1998 Question 37

Question 37

Public Finance

When an indirect tax is levied on the producer of a good, the burden on the consumer will depend largely on the

  1. A.elasticity of demand for the good
  2. B.proportion of the consumer's income spent on the good
  3. C.elasticities of demand and supply of the commodity
  4. D.availability of substitutes for the commodity.
Show the answer and explanation

Answer: C (elasticities of demand and supply of the commodity)

Explanation

How much of a tax the producer can pass on depends on how buyers and sellers react to price: the more inelastic demand is relative to supply, the more the consumer pays. So both elasticities matter.