Question

According to the standard market model and neoclassical welfare analysis, a tax levied against a consumer good will necessarily come mostly out of consumer surplus if...

A) Consumer are directly responsible for paying the tax

B) Demand is relatively elastic

C) Demand is relatively inelastic

D) Producers are directly responsible for paying the tax

Answer 1

Incidence of tax on consumers and producers depends on the respective elasticity of demand and supply.

If demand is relatively inelastic than supply then consumers bear the greater burden of tax than producers.

On the other hand, if demand is relatively elastic than supply then producers bear the greater burden of tax than consumers.

So,

A tax levied against a consumer good will necessarily come mostly out of consumer surplus if demand is relatively in elastic.

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