Question

What is the general outcome of a tax in terms of equilibrium price and equilibrium quantity?...

What is the general outcome of a tax in terms of equilibrium price and equilibrium quantity?

Do consumers pay more or less after a tax is imposed?

Do producers receive more or less after a tax is imposed?

How does elasticity affect the burden of taxation?

Does it matter whether the government levies a tax on consumers or producers?

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Answer #1

Ans. The general outcome of a tax is the increase in the equilibrium price level and a decrease in equilibrium quantity.

Consumers pay more after the tax is imposed if its elasticity of demand is less than the elasticity of supply of the producers.

Producers will pay more after the tax if its elasticity of supply is less than the elasticity of demand of the consumers. Hence, if elasticity of supply is more inelastic than elasticity of supply then producers will pay more and receive less after the tax is imposed.

The more inelastic the elasticity, the greater the burden of tax on producer/consumer.

It does not matter whether the government imposes a tax on consumers or producers since the burden completely depends on the elasticity of demand/supply.

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