Consider the market for facemask. In the backdrop of COVID-19 pandemic, if the government imposes a sales tax on facemask, how the tax burden will be distributed between the consumer and the seller of face-masks? Explain with an adequate graph.
In the market for facemask, demand is relatively inelastic becaus of the COVID-19 pandemic. Supply is elastic in the sense that supply will increase when the price increases. Given this scenario, if the government imposes a sales tax on face masks, most of it will be borne by the consumer because demand curve is more inelastic than supply curve. Burden of tax is higher for the consumer. This can be illustrated with the following graph:
S is the elastic supply curve and D is the inelastic demand curve.When tax is imposed, the supply curve moves to S1.
As shown in the graph above, Ps is the price received by the seller, and Pb is the price paid by the buyer. The difference is the tax amount. As the demand curve is comparatively inelastic, buyers bear most of the tax. A small share of the tax falls on producers.
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