Final answer:
In a market where a per-unit tax causes a greater reduction in consumer surplus than producer surplus, demand must be less elastic than supply.
This condition means consumers will bear a larger share of the tax burden because they have a lower tendency to reduce their quantity demanded compared to how sellers would reduce quantity supplied.
Therefore, the correct answer is: option 'Demand is less elastic than supply.'
Step-by-step explanation:
When a per-unit tax is imposed on a good in a competitive market, and the reduction in consumer surplus is greater than the reduction in producer surplus, it suggests that the burden of the tax falls more heavily on consumers.
This scenario typically occurs when demand is less elastic than supply, meaning that consumers are less responsive to price changes than sellers. When demand is less elastic, consumers will bear a larger portion of the tax because they are not as likely to reduce their quantity demanded in response to a higher price as sellers are to reduce their quantity supplied.
The tax revenue is represented by the shaded area formed by the tax per unit multiplied by the total quantity sold, Qt. The tax incidence on consumers is Pc - Pe, while the tax incidence on sellers is Pe - Pp.
If the demand is more elastic than supply, consumers are more likely to reduce their quantity demanded, which in turn lowers tax revenue. In contrast, if the supply is more elastic than demand, sellers are more likely to reduce the quantity sold. For a tax to create significant revenue, one or both sides of the market should be relatively inelastic.