Explain the effect of the imposition of a unit tax on bananas on market price

Imposition of a unit tax on goods causes supply to decrease. The supply curve moves upwards by the value of the unit tax. This changes its intersection with the demand curve to a higher price and lower quantity. However, the price increase is lower than that of the unit tax, since quantity demanded normally reduces with price.This discrepancy increases with greater inelasticity of the demand curve, as inelasticity indicates an unwillingness or inability for the customer to accept a higher price; it also increases with greater elasticity of the supply curve, as this indicates higher revenues acquired from selling redundant factors of production.

Answered by Bradley C. Economics tutor

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