Price elasticity of excess demand for Sri Lankan rubber

Abstract

The rubber industry in Sri Lanka declined in terms of output, cultivated area and share of gross domestic product during the period 1970 to 1986. This cannot be attributed only to the process of economic development. The content and implementation of government policies contributed far more than general economic development to the decline of the rubber industry. The export tax on rubber, one major source of government revenue, impacted significantly on rubber industry profitability.

In this dissertation the theory of optimal tax was used to show that the optimal export tax is just the reciprocal of the price elasticity of excess demand. The so-called calculation method based on the Yntema formula was used to estimate the price elasticity excess demand for Sri Lankan rubber. This procedure involved estimating the own-price supply and demand elasticity’s, price transmission elasticity’s and trade shares.

The estimates derived with this methodology yielded a fairly elastic value of -14.02 for price elasticity of excess demand rubber in Sri Lanka. This implies that the application of a 7 percent export tax would be optimal for the Sri Lankan rubber industry.