WAEC Economics 2022 Theory — Question 7

Model answer

(a)(i) Specific tax is an indirect tax levied per unit of an output irrespective of its value. (ii) Value added tax is an indirect tax levied on value added to a good or service produced. It is levied on the difference between sales revenue and the cost of producing an output. (b)(i) Demand is perfectly inelastic if at every price level, quantity demanded remains the same. The market price of the commodity will rise by the full amount of the tax and the whole burden of the tax rests on the consumer. [Diagram: vertical demand curve D; supply shifts from S0S0 to S1S1; price rises from 0P1 to 0P2; the full amount of the tax P1E1E2P2 rests on the consumer] 0P1 was the price before the imposition of an indirect tax and the initial supply curve was S0S0. When the tax was imposed, the supply curve shifted from S0S0 to S1S1 forcing the price to rise from 0P1 to 0P2. The full amount of the tax is P1E1E2P2 above and is borne by the consumer. (ii) Demand is perfectly elastic at a given price; consumers are willing to buy all the commodities that are available and none at any price above the market price. Since the producer cannot increase the price of the commodity, price remains the same and the entire burden of the tax rests on the producer. [Diagram: horizontal demand curve D; supply shifts from S0S0 to a new steeper supply curve S1S1; price remains the same at 0P1, and the whole burden of the tax P1E1E2P2 rests on the producer] The imposition of an indirect tax results in a leftward shift of the initial supply curve S0S0 to a new supply curve S1S1. Price remains the same at 0P1, and the whole burden of the tax P1E1E2P2 rests on the producer.