Question

In the market for tomatoes, assume the market demand is perfectly inelastic and the market supply is inelastic. If a tax is placed on the suppliers in this market, how will the tax burden be distributed

Answer 1

In a market with perfectly inelastic demand and inelastic supply, the tax burden will mostly fall on consumers, as they will continue to purchase the same quantity regardless of price increases. Sellers with inelastic supply will bear less of the tax burden but will still absorb a significant fraction due to their limited flexibility to adjust production.

Step-by-step explanation:

When a tax is placed on suppliers in a market where the demand is perfectly inelastic and the supply is inelastic, the tax burden will mostly fall on the consumers because they are not responsive to price changes due to the perfect inelasticity of demand. In such a market, consumers will continue to buy the same quantity regardless of price increases. The suppliers, despite having inelastic supply, will still find that the relative inflexibility of their production capacity means that they will bear less of the tax burden compared to consumers. Since the consumers' demand does not change with price, they have to pay whatever the market demands, whereas suppliers can only increase the price to a certain extent without being able to reduce their output significantly.

If we consider the elasticity and tax incidence, when supply is more inelastic than demand, which is the case when comparing perfectly inelastic demand with inelastic supply, sellers are less able to pass the full burden of the tax onto consumers. As a result, sellers will absorb a greater fraction of the tax imposed, leading to lower net prices received for their goods, even as consumers continue to pay a higher price post-tax.

Answer 2

Consumers will bear all the tax

Step-by-step explanation:

O Consumers will bear a greater burden of the tax, but not all the tax. O Consumers and producers will bear the tax burden equally O Producers will bear all the tax Consumers will bear all the tax O Producers will bear a greater burden of the tax, but not all of the tax.

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.

Infinitely elastic demand is perfectly elastic demand. Demand falls to zero when price increases

Perfectly inelastic demand is demand where there is no change in the quantity demanded regardless of changes in price.

The party with the less elastic demand bears the tax burden