Question

Suppose that the demand and supply elasticities of crude oil are -0.906 and 0.515, respectively. What is the tax incidence on buyers if government imposes a tax on extraction of oil. The tax is collected from suppliers.

Answer 1

Price elasticity of demand and supply helps find out the tax burden on the buyers and the sellers depending upon whether the good is elastic or inelastic.When the supply of the good is more elastic than demand the tax burden falls on the buyers.Similarly if demand is more elastic seller will bear the tax burden.

To calculate the tax incidence on the buyers = elasticity of supply/ elasticity of supply + elasticity of demand

= 0.515/-0.906+0.515 = 0.515/-0.391 = -1.31