Question

The amount of a tax paid by the buyers will be smaller the

		more elastic the demand and the more inelastic the supply.
		more inelastic the demand and the more elastic the supply.
		more inelastic are both the supply and demand.
		more elastic are both the supply and demand.

Answer 1

Option A.

• The burden of tax paid by the seller's and buyers depend on the relative elasticities of demand and supply.
• When the demand is more elastic than supply, then the burden of tax falls more on the seller's and less on the buyer's.
• This is because when the demand is more elastic, then if the seller's impose the tax burden on the buyer's, then their willingness to purchase will fall.
• Hence the firms cannot pass their burden of tax on the buyer's when their demand is elastic.