Question

2. Suppose supply is perfectly inelastic and demand is relatively elastic. Who bear all the tax burden, buyers or sellers? Explain in details.

3. Suppose demand for electricity is inelastic, but not perfectly. A sales tax is imposed, and the tax is levied on buyers. Draw a graph to show the effects of the tax. Indicate CS, PS, tax revenue and DWL after tax on your graph.

Answer 1

1 - Since the supply is inelastic but the demand is elastic in nature , the seller will bear the burden of the taxes and all other extra charges. This is because , if the burden will be passed on to the buyers , this will increase the cost of goods , demand being elastic in nature will reduce and the revenue will fall.

To avoid this , the burden will be borne by the seller as the supply will not change being inelastic in nature. This will prevent the demand from falling.