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There is a sales tax that producers remit to the government, and the economic incidence of...

There is a sales tax that producers remit to the government, and the economic incidence of the tax fall completely on the producer. If instead the consumers remit the tax, where will the legal incidence of the tax fall? Why?

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Answer #1

It is given that the economic incidence of tax is falling completely on the producer. This happens under two conditions: when the demand is perfectly elastic and when supply is perfectly inelastic.

Therefore if consumers are paying the tax instead of producers and we have the same two conditions, we will still have the same result that produces are paying the entire tax.

This happens because when demand is perfectly elastic consumers are able to bypass the entire tax on producers. Similarly when supply is perfectly inelastic, producer bear the entire burden of tax because of inelastic supply.

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