Question

the government is planning to impose a new tax on computers, and they are evaluating potential undesirable consequences on the welfare of buyers and sellers. if the demand for computers is relatively more elastic than the supply, which of the following statements about the effects is true? group of answer choices producer and consumer surplus will be equally affected. producer surplus will shrink more than consumer surplus. producer surplus will shrink less than consumer surplus. total surplus will stay constant.\

Answer 1

When demand is more elastic than supply and a tax is imposed, producers bear a greater tax burden, leading to a larger decrease in producer surplus compared to consumer surplus, and total surplus will decrease due to the deadweight loss created by the tax.

Step-by-step explanation:

The question is related to the concept of tax incidence and the elasticity of demand and supply in economics. When a government imposes a new tax on a good where demand is more elastic than supply, it creates different effects on producer and consumer surplus. With an elastic demand, consumers can more easily find substitutes and decrease their quantity demanded in response to higher prices resulting from a tax. In contrast, if the supply is inelastic, producers have less flexibility to change their quantity supplied. In such a scenario, producers bear a greater share of the tax burden as they cannot pass on the entire tax to consumers. This results in the producer surplus shrinking more than the consumer surplus.

Furthermore, total surplus will decrease as a tax creates a deadweight loss, which is the loss in total welfare that does not go to either the government or the market participants. This occurs because the tax leads to a decrease in the quantity traded below the socially optimal level.