Please help me with the following questions about taxes and tax incidence. If there is a tax on consumers, will consumers’ tax burden increase, decrease, or remain unchanged as demand becomes...

Please help me with the following questions about taxes and tax incidence.

  1. If there is a tax on consumers, will consumers’ tax burden increase, decrease, or remain unchanged as demand becomes more elastic?

  2. If there is a tax on suppliers, will consumers’ tax burden increase, decrease, or remain unchanged as demand becomes more elastic?

  3. If there is a tax on consumers, will producers’ burden increase, decrease, or remain unchanged as supply becomes more elastic?

  4. If there is a tax on suppliers, will producers’ burden increase, decrease, or remain unchanged as supply becomes more elastic?

Please give the exact answers for each question. Thank you!

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If there is a tax on consumers, will consumers’ tax burden increase, decrease, or remain unchanged as demand becomes more elastic?

Question 1:  The answer to this question, as to all of these questions, will depend on just how elastic demand (and supply, for the last two questions) is.  This is because the degree of elasticity is what determines where the tax burden will fall.

In Question 1, I am assuming that we are comparing the consumers’ tax burden after the tax is imposed to their burden before the tax was imposed.  If this is correct, consumers’ tax burden will not rise very much if at all.  If demand were perfectly elastic, suppliers would bear all of the tax burden.  This is because consumers would not buy any goods at a higher price.  The suppliers would have to pay the entire tax themselves in order to sell any goods.  If demand is less than perfectly elastic, consumers will bear some of the burden.  The more elastic demand is, the less of the burden they bear.

So, we can say that the consumers’ tax burden will rise a little, but we cannot know how much unless we know how elastic demand is.

Question 2:  The answer to Question 2.  Is the same as the answer to Question 1.  It does not matter who the tax is nominally imposed on (whether it is on the producer or the consumer).  All that matters is elasticity of demand.  The greater the elasticity of demand, the greater the proportion of the tax that the supplier will bear.  Therefore, we can say that the consumers’ tax burden will probably rise a little, but that we cannot know exactly how much unless we know how elastic the demand is.

Question 3:  Here, we are talking about the elasticity of supply.  If supply is elastic, the supplier will supply much more of a good when its price rises.  If supply is inelastic, the supplier will not supply much more of the good when the price increases.  When supply is inelastic, the seller bears more of the tax burden.  When supply is elastic, the buyer bears more of the burden.  In this question, supply is becoming more elastic.  Therefore, the buyers’ tax burden will increase more than the producers’ burden does.  The producers’ burden will increase a little (unless supply is perfectly elastic) but it will not rise by much.

Question 4.  The answer is the same as the answer to Question 3.  The nominal incidence of the tax is irrelevant.  The burden will be determined by the elasticity of supply.  Since supply is becoming more elastic, more of the burden will fall on the consumer.  Producers’ burden will probably rise a little, but we cannot know how much it will rise unless we know how elastic supply is.

Please refer to the link below to see all of this in graphic form.

Sources:

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