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An excise tax introduces a wedge between the price paid by consumers and the price received...

An excise tax introduces a wedge between the price paid by consumers and the price received by producers. Explain who bears the tax burden when 1. The price elasticity of demand is elastic and the price elasticity of supply is inelastic. Draw graphs to represent this condition. 2. The price elasticity of demand is inelastic and the price elasticity of supply is elastic. Draw graphs to represent this condition.

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Answer #1

More inelastic side of the market bears more tax.

Elasticity of supply is perfectly inelastic and demand is elastic and tax is imposed on consumers: Price producer recieve falls from P to P1 which means whole burden is on producers.

Elasticity of demand is inelastic and supply is perfectly elastic and tax is imposed on producers: Price consumer pay rises from P to P1 which means whole burden falls on consumers.

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