Question

The demand for Carlo Rossi wine is relatively elastic since there are many other wines available to choose from. If the government decides to tax just this specific brand of wine, which of the following do you think will occur? (specifically, assume the supply curve is steeper than the demand curve)
a. The majority of the tax will be borne by the producer
b. All of the tax will be passed on to the consumer
c. All of the tax will be borne by the producer
d. The majoiy of thetax willbe bone by the consumer

Answer 1

Answer:

A. The majority of the tax will be borne by the producer.

Explanation:

When an Indirect Tax (impact & incidence on different people) is levied : The burden of it is shifted to the party (buyers/ sellers) whose element (demand/ supply) is more inelastic (less responsive to price).

In this case: If demand for Carlo Rossi wine is relatively elastic (because of substitutes presence) - levying tax on it will hence imply major burden to be borne be producer (because demand is relatively elastic).

b,c : All tax will be borne passed to consumer / producer - if demand is perfectly inelastic/ if supply will be perfectly inelastic respectively.

d: Majority tax will be borne by consumer - if demand is relatively inelastic (than supply)