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If the price elasticity of supply is zero, a tax on suppliers will raise the market...

If the price elasticity of supply is zero, a tax on suppliers will raise the market price. Is this true or false?

Explain your answer elaborately and with a graph.

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Answer #1

Answer- False

If the price elasticity of supply is zero, it is known as perfectly inelastic. It means when a change in price has no effect on the quantity supplied. If supply is more inelastic, sellers bear most of the tax burden. When the tax is introduced in the market with an inelastic supply, sellers have no choice but to accept lower prices for their business. The tax burden in this case is on the sellers. Sellers pay the entire tax. In the Figure 'D' is demand curve and 'S' is supply curve. Pc is the price paid by the consumers and Pp is the price received by the producer. The distance between the Pc and Pp is the tax rate. If the price elasticity of supply is zero, a tax on suppliers cannot raise the market price. Figure has attached below:

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