Question

A market in perfect competition is in equilibrium. Let the demand's price elasticity be -1.25 and the price elasticity of the offer is 0.25. If a tax of $ 10 per unit is introduced, who will then carry the largest part of the tax burden?

A. Consumers, since demand is relatively more elastic than the supply

B. Consumers, then demand. is relatively more inelastic than the supply

C. Manufacturers, as the supply is relatively more elastic than demand.

D. The producers, as the supply is relatively more inelastic than demand.

Please show and explain

Answer 1

When tax is imposed on a commodity, both buyers and sellers share the burden of the tax.

However, the proportion of burden to be borne by buyers and sellers depends on the respective elasticity of demand and elasticity of supply.

If supply is relatively more inelastic than the demand then sellers bear greater burden of tax.

On the other hand, if demand is relatively more inelastic than the supply then buyers bear greater burden of tax.

In given case, price elasticity of demand is -1.25 and price elasticity of supply is 0.25.

This implies that demand is elastic while supply is inelastic.

In other words, supply is relatively more inelastic than the demand .

Thus, producers will carry the largest part of tax burden.

Hence, the correct answer is the option (D).