Chapter 4 InQuizitive Chapter 4 Market Outcomes and Tax Inci

Chapter 4> InQuizitive: Chapter 4: Market Outcomes and Tax Incidence INQUIZITIVE Chapter 4: Market Outcomes and Tax Incidence e Page(s) 125-130 4.3. Why do taxes create deadweight loss in otherwise efficient market Suppose the government imposes a tax on three products with differing demand elasticities Match the product to the group that will most likely bear the incidence of the tax. Drag each item on the left to its matching item on the right the government producers consumers and producers wsss highly inelastic somewhat elastic highly elastic consumers

Solution

The impact of the incidence of tax would be borne by the consumer or producer depending on their respective elasticity. High elasticity would mean flexibility to change the price and less impact of taxes hence government prefer taxing goods whose demand/ supply is inelastic.

In case of highly inelastic demand for a product, the consumer would bear the tax burden.

In case of highly elastic demand of a product, the producer would bear the tax burden

In case of somewhat elastic demand of a product, both producer and consumer bear the burden of the tax.