Question

Suppose the price elasticity of demand is relatively elastic and the price elasticity of supply is relatively inelastic in a specific market. If an excise tax is imposed on this good, who will bear the greater burden of the tax?a. governmentb. consumersc. producersd. both consumers and producers equally

Answer 1

Answer:

In this particular market,producers or suppliers will bear the burden of the excise tax.Hence,the correct answer is option c. or producers.

Explanation:

In the market specified in the question,price elasticity of demand is relatively elastic and the price elasticity of supply is relatively inelastic.It essentially implies that the consumers are relatively more price elastic or price sensitive compared to the suppliers in the market.Hence,consumers will be more reactive to any change in price of the good than the sellers in the market.In this scenario,if the excise tax is imposed on the consumers,they will be understandably reluctant to bear the burden of higher price of the good due to the imposition of the tax and consequently,due to the relatively higher price elasticity of demand,the consumer demand for the product would fell significantly.Now,since the producers are relatively less price elastic or sensitive than the consumers,a higher good price due to the imposition of the tax won't affect the supply level as much as the consumer demand.Therefore,in this case,due to the difference in the price elasticity of demand and supply,the producers or suppliers will bear the burden of the excise tax.