Final answer:
Both consumers and producers are impacted by taxes in a market, with the tax incidence depending on the elasticity of demand and supply. Taxes alter market equilibrium, prices, quantities, and can lead to resource reallocation depending on whether goods are elastic or inelastic.
Step-by-step explanation:
When a tax is imposed on a market, both consumers & producers are affected, no matter who pays the tax. The analysis of how a tax burden is divided between consumers and producers is known as tax incidence. The effect of a tax on the equilibrium quantity and the price depends on the elasticity of demand and supply. In markets with inelastic supply, such as beachfront hotels, where sellers cannot easily change the amount they provide, the tax burden primarily falls on the sellers. However, with an elastic supply, where producers can adjust their business to avoid the taxed good, the burden is less on sellers and more on the quantity sold.
Resource allocation is also impacted by taxes as they can shift the supply curve to the left, raising the price of the taxed good, leading to decreased consumer purchases. This reaction can cause producers to cut back on production or labor, potentially forcing a reallocation of labor, capital, or entrepreneurs to other industries. The response to this varies based on whether the product is elastic or inelastic. Consumers may seek substitutes for elastic goods, but might have no choice but to absorb the extra cost for inelastic goods.