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Suppose that the government imposes a tax of $1.00 on a litre of gas 1. Suppose...

Suppose that the government imposes a tax of $1.00 on a litre of gas

1. Suppose that the demand for gas is price inelastic. Will the buyer pay more or less than 50 cents? Why?
2. Suppose that the demand for gas is price elastic. Will the buyer pay more or less than 50 cents? Why?

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Answer #1

1 - The buyer will pay more tax . This is because the demand is inelastic and hence the demand and the total revenue will not decrease as a result of the imposition of tax. Hence the buyer will bear more burden i.e more than 50 cents of tax.

2 - If the demand is elastic , less than 50 cents of burden of tax will be borne by the buyers. This is because the demand being elastic , the imposition of tax will increase the price and reduce demand. This will reduce the total revenue. To avoid this , lesser burden will be borne by buyers.

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