Question

Assuming the graph is drawn to scale, which of the following is true regarding the burden of the tax in the market above?

Answer 1

The tax burden depends on the relative elasticity of demand and supply, and it can shift between consumers and sellers.

Step-by-step explanation:

In the given graph, the tax burden is determined by the relative elasticity of demand and supply. If demand is more inelastic than supply, consumers bear most of the tax burden. On the other hand, if supply is more inelastic than demand, sellers bear most of the tax burden. For example, where the tax burden falls disproportionately on the sellers, a larger proportion of the tax revenue is due to the resulting lower price received by the sellers. In Figure 1(b), where the supply is more elastic than demand, the tax incidence falls disproportionately on consumers. The tax burden depends on the elasticity of demand and supply, and it can shift between consumers and sellers depending on the slopes of the demand and supply curves.