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Tax burdens are higher on consumers when: supply and demand are elastic. demand is elastic and...

Tax burdens are higher on consumers when:

supply and demand are elastic.

demand is elastic and supply is inelastic.

demand is inelastic and supply is elastic.

demand and supply are inelastic.

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Answer #1

Answer :

Whenever a tax is imposed on a good or a service a price wedge is created between the price that buyers have to pay and the price that sellers receive for selling the good. This wedge or difference between the two prices is the tax amount. Now in general when a tax is imposed buyers are required to pay a price higher than the equilibrium price without the tax. Similarly sellers receive a price which is less than the equilibrium price without the tax.

So eventually both sellers and buyers share the burden of the tax, but the extent to which depends on their respective price elasticities. A higher price elasticity means a higher responsiveness to changes in price and thus the share of burden is lower.

Thus : Tax burdens are higher on consumers when the demand is inelastic (less responsive to price changes) and supply is elastic (more responsive to price changes).

Answer : Option c) demand is inelastic and supply is elastic

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