Final answer:
When an excise tax is placed on a product with perfectly inelastic demand, the entire tax will be paid by the consumer because the quantity demanded does not change with price increases.
Step-by-step explanation:
If an excise tax is placed on a product with perfectly inelastic demand, the entire tax burden will be borne by the consumer, meaning the correct answer is 1) the entire tax will be paid by the consumer. This outcome is because consumers with perfectly inelastic demand will continue to purchase the same amount of the product regardless of price increase due to the tax. There's no change in quantity demanded, leading to consumers absorbing the full cost of the tax. The interplay of elasticities in demand and supply determines the tax incidence between consumers and producers. The more inelastic the demand, the higher the tax burden on consumers, and vice versa.
An excise tax introduces a wedge between the price paid by consumers (Pc) and the price received by producers (Pp). When the demand is more elastic than supply, producers bear a larger share of the tax burden. Conversely, when the supply is more elastic than the demand, consumers bear a larger share of the tax burden. However, in the case of perfectly inelastic demand, consumers have no alternative to reduce consumption; thus, they incur the entire tax, regardless of the elasticity of supply.