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.

Please do not copy and paste other Chegg posts, thank you.

Answer 1

Ans) When government imposes tax, it does not really matter upon whom the tax is imposed. Burden is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

When demand is more elastic and supply is inelastic, sellers will bear greater burden of tax.

When supply is more elastic and demand is less elastic then buyers will bear greater burden of tax.