QUESTION 10 Figure Commodity Tax with Elastic Supply Accordi

QUESTION 10 (Figure: Commodity Tax with Elastic Supply) According to the figure, who bears the greater burden of the tax? ure: Commodity Tax with Elastic Supply O A. The buyer will bear the greater burden of the tax B. The buyer and the seller will split the tax burden equally O C. The government will bear the full burden of the tax D. The seller will bear the greater burden of the tax

Solution

The tax burden depends upon the price elasticity of the demand and supply. When the supply is perfectly inelastic the producers bear the whole tax burden and if the demand is perfectly inelastic the consumers bear the whole tax burden.

When the supply is more elastic than the demand the consumers bear the tax burden and if the demand is more elastic than supply the producers bear the most tax burden.

The above graph shows a more elastic supply curve than the demand curve and here the tax burden will be greater on the consumers.

ANS: A). The buyer will bear greater burden of the tax burden.