Question

Suppose a tax is levied in a market in which demand is downward sloping and supply is perfectly elastic. which of the following statements is/are true?

i. producer surplus decreases.
ii. the deadweight loss is zero.
iii. consumers bear all the burden of the tax.

Answer 1

In a market with a perfectly elastic supply, the introduction of a tax does not decrease producer surplus, creates no deadweight loss, and results in consumers bearing the entire tax burden.

Step-by-step explanation:

When a tax is levied in a market with downward sloping demand and perfectly elastic supply, several outcomes occur. First, since the supply is perfectly elastic, producers can supply any quantity at the same price, and hence, producer surplus remains unchanged. This contradicts statement i, which suggests that producer surplus decreases. Second, with a perfectly elastic supply, the tax does not create a deadweight loss; therefore, statement ii is true. This is because the quantity sold remains the same; the market remains efficient despite the tax. Lastly, because suppliers can sell at the same price, they do not bear any of the tax burden, which means that consumers bear all the burden of the tax, validating statement iii.