Question

Imports are goods made in other countries. A tariff is a tax on imported goods. The...

Imports are goods made in other countries. A tariff is a tax on imported goods. The current administration is fond of saying "China is paying the tax." Use the tools of supply and demand to explain who actually pays the tariff, assuming, in the short run, a relatively inelastic demand curve.

(Hints: A relatively inelastic demand curve is steep. The answer can be found on the vertical axis).

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Answer #1

Demand for a commodity is said to inelastic when change in quantity Demanded is less than change in price. That is , large change in price causes less change in quantity demanded. Demand is not very responsive to price.

By imposing tarrifs on imported goods price rises. However the demand for the imported goods is relatively inelastic. In such case the burden of tax falls heavily on buyer who can't adjust to a price change. In other words buyers bear more burden when demand is more inelastic.

In the below figure, supplycurve is elastic and demand curve is more inelastic the tax burden on consumers P1 - P is larger than the tax incidence on producers P - P0.

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