Final answer:
The cost of a government-imposed tax on buyers and sellers varies with market elasticities and does not always match the revenue raised by the government. Tax incidence and resulting economic burden depend on how buyers and sellers respond to price changes, dictated by the elasticity of demand and supply.
Step-by-step explanation:
When the government places a tax on a product, the cost of the tax to buyers and sellers compared with the revenue raised can vary depending on market conditions. The tax revenue is typically calculated by multiplying the tax per unit by the total quantity of the product sold after the tax is imposed. However, the actual economic burden of the tax, known as the tax incidence, falls on both consumers and sellers to differing extents based on the elasticity of demand and supply for the product.
If demand is very elastic, consumers are more likely to reduce their quantity purchased rather than pay higher prices, leading to lower tax revenue. Conversely, if supply is very elastic, sellers will likely reduce the quantity they sell instead of accepting lower prices, also resulting in reduced tax revenue. It's important to understand that the more elastic either the supply or demand, the greater the distortion of the market and the lower the revenue generated from the tax. In special cases, such as markets with very inelastic supply, like beachfront hotels where sellers have few alternatives, taxes have less impact on the equilibrium quantity and the tax burden heavily falls on sellers.