Question

Under what circumstances does the burden of an excise tax fall mainly on producers?

1) When the supply is relatively inelastic and demand is fairly elastic
2) When the supply is relatively elastic and demand is fairly inelastic
3) When consumers do not have many substitutes for the good
4) When it is easy for suppliers to expand production of the good

Answer 1

The burden of an excise tax falls mainly on producers when the supply is relatively inelastic and demand is fairly elastic because producers cannot easily adjust production, whereas consumers can find alternatives and reduce consumption.

Step-by-step explanation:

The circumstances under which the burden of an excise tax falls mainly on producers are when the supply is relatively inelastic and demand is relatively elastic. This means that producers find it difficult to adjust their production levels in response to the tax, while consumers can more easily find substitutes and reduce their consumption. When the demand for a good is elastic, consumers are more sensitive to price changes, and producers cannot pass the tax on to consumers without losing a significant amount of sales. Therefore, producers end up bearing a larger share of the tax burden.

In conclusion, option 1) 'When the supply is relatively inelastic and demand is fairly elastic' is the correct answer to the question of when the excise tax burden falls mainly on producers. This concept is essential in understanding the tax incidence of an excise tax and how it affects different market participants.