Question

Which of the following is correct?

a. Buyers and sellers always pay equal amounts of a tax

b. Buyers pay more of the tax when demand is inelastic

c. Buyers pay more of the tax than sellers when the tax is small

d. Sellers pay more of the tax when demand is inelastic

Answer 1

• Option B is the correct answer.
• Buyers pay more of the tax when demand is inelastic.
• The given question is a case of tax incidence. It is the analysis of how tax burden is divided between buyers and sellers. Elasticity of demand and supply plays an important role in deciding the tax burden on both buyers and sellers.
• In the case of inelastic goods, an increase in tax will not be affecting its demand to a great extend. That is, buyers' reaction to price changes will be minimal. So the consumer or the buyer will pay more of the tax. Example, tobacco products.