Question

The Finance Minister is considering to tax cigarettes. The demand for cigarettes is much more inelastic...

The Finance Minister is considering to tax cigarettes. The demand for cigarettes is much more inelastic than the supply of cigarettes.
a) Who pays the tax, the consumer, the producer or both. Explain.
b) Is there an overall dead-weight loss? Explain.
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Homework Answers

Answer #1

Answer) The tax burden is inversely related to the elasticity. Since the elasticity of demand is inelastic. The entire tax burden falls upon the consumer. The producer doesn't pay tax on the production of the cigrette. Whereas the consumer borne the entire tax burden. This is the best example of an indirect tax.

Answer 2) No, there exist a dead weight loss. Which indicates a loss for the society. As the entire loss of the consumer is captured by the producer. When the demand is inelastic, there is no dead weight loss.

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