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

If demand is very elastic and supply is very inelastic then the producer will bear the maximum amount of tax. And if demand is very inelastic and supply is very elastic then consumer will bear the major portion of the tax. This happens because, when demand curve is very elastic the tax burden is generally beard by the seller and if it is inelastic then the burden is beared by the consumer. In case of supply, when the curve is very elastic the burden is beared by consumer and when inelastic the burden is beared by seller.