Question

What is the relationship between elasticity of supply and demand and the burden of the tax?

What is the relationship between elasticity of supply and demand and the burden of the tax?

Homework Answers

Answer #1

The tax incidence on buyers and sellers depend on the elasticity of demand and the elasticity of supply. If the supply is relatively more elastic than demand then buyers will bear more tax burden because the percentage change in quantity demanded will be less than the percentage change in quantity supplied from a given price change. Similarly, the percentage change in quantity demanded is more than the percentage change in quantity supplied when the demand is relatively more elastic than supply and sellers bear most of the tax burden. When the elasticity of supply and the elasticity of demand are equal in absolute terms then the buyers and sellers equally share the tax burden. So, the tax burden depends on the elasticity of demand and supply.

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