Question

Why should you care about the elasticity of demand and elasticity of supply for a good you are considering taxing? Include a demand and supply sketch in your explanation.

Answer 1

Answer - If the demand is more elastic than supply , taxing the buyer would reduce the demand. Hence seller should bear the burden of tax so that demand is not affected. If supply is more elastic than than demand , taxing the supplier will reduce the supply. To prevent this , the buyer should be taxed. Hence the elasticity of demand and supply is the important factor on who should bear the burden of tax.

Here since the demand curve is inelastic , due to the larger tax , quantity just fell by the smaller amount. Hence more tax will be paid by the buyer. The reverse condition will be true for seller.