Final answer:
In a market with an inelastic supply, the tax burden falls disproportionately on the sellers. When a tax is introduced, it results in a difference between the initial equilibrium price and the price paid by the buyers and received by the sellers.
Step-by-step explanation:
The effect of a tax on buyers and sellers can be analyzed by examining the tax incidence on each group. In a market with an inelastic supply, the tax burden falls disproportionately on the sellers. This means that the sellers bear a larger share of the tax burden compared to the buyers. On the other hand, if the supply is more elastic than demand, the tax burden falls disproportionately on the buyers.
When a tax is introduced, it results in a difference between the initial equilibrium price and the price paid by the buyers and received by the sellers. The tax incidence on the consumers is determined by the difference between the price they pay and the initial equilibrium price, while the tax incidence on the sellers is determined by the difference between the initial equilibrium price and the price they receive after the tax is introduced.
The tax revenue is calculated by multiplying the tax per unit by the total quantity sold. This tax revenue is represented by the shaded area in the graph. The more elastic the demand curve, the easier it is for consumers to reduce quantity instead of paying higher prices. Similarly, the more elastic the supply curve, the easier it is for sellers to reduce the quantity sold instead of taking lower prices. In markets where both demand and supply are very elastic, the imposition of an excise tax generates low revenue.