ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Producers will pay more of the tax
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Consumers will pay more of the tax
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Producers will pay all the tax
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Consumers will pay all the tax
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Detailed explanation-1: -When supply is more elastic than demand, the tax burden falls on the buyers. If demand is more elastic than supply, producers will bear the cost of the tax.
Detailed explanation-2: -The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.
Detailed explanation-3: -If the elasticity of demand is equal to the elasticity of supply, the tax burden is the same for the buyers and the sellers. If supply is more elastic, buyers pay more. Conversely, when demand is more elastic, sellers pay more. The tax burden will lie more on the buyer if the demand is more inelastic than the supply.
Detailed explanation-4: -If a tax is imposed on a market with inelastic demand and elastic supply: buyers will bear most of the burden of the tax.
Detailed explanation-5: -As can be seen in the diagrams below, the tax burden will fall more on the buyer if demand is inelastic or supply is elastic, but will fall more on the seller if demand is elastic or supply is inelastic.