Question

If the government puts a $5 tax on shoes and collects taxes from the suppliers, then assuming neither supply nor demand are perfectly inelastic, we would expect for the price consumers pay for shoes to

a. Increase by exactly $5.
b. Decrease by exactly $5.
c. Increase by less than $5.
d. Increase by more than $5.

Answer 1

If the government introduces a $5 tax on shoes collected from suppliers and assuming neither supply nor demand are perfectly inelastic, the price consumers pay for shoes will increase by less than $5 due to the tax burden being shared between consumers and producers based on the elasticity of demand and supply.

Step-by-step explanation:

When a government imposes a $5 tax on shoes and collects this amount from suppliers, we can expect the price consumers pay for shoes to increase by less than $5. This is because the tax introduces a wedge between the price consumers pay (Pc) and the price producers receive (Pp), with a portion of the price being paid to the government. Economic incidence of the tax depends on the elasticity of demand and supply. In the case of an inelastic supply and elastic demand, producers will bear a larger portion of the tax burden and cannot pass the full tax onto consumers. Therefore, the consumer price will rise, but by an amount smaller than the tax itself, as shown in Figure 5.10 where the supply curve shifts leftward to a new equilibrium.