Question

Consider the market for white athletic socks, which consumers consider to be identical products. If the demand is very elastic and the supply is very inelastic, how would the burden of a new tax on athletic socks be shared between consumers and producers? What if the situation were reversed – a very inelastic demand and a very elastic supply? How would that change the way consumers and producers share the burden of the new tax? Justify your answer.

Answer 1

Answer:

Elastic demand and inelastic supply : producer will share the burden

Inelastic demand and elastic supply: Consumers will share the burden

Explanation:

If the demand is very elastic and the supply is very inelastic, the burden of the tax will be borne largely but the producers. The surplus of the producers will decline substantially, because of very elastic demand of buyer the demand for athletic socks will decline. In the case of very inelastic demand and very elastic supply, the burden of the tax will be borne largely by the consumers. Similarly, due to high elastic supply, the supply of athletic socks in the market will decline and so as the consumer surplus.