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

  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?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

These questions will be much easier to understand if you remember that the elasticity of demand (or supply) is what determines who the tax incidence falls upon.  There are rules for both elasticity of supply and elasticity of demand. 

The rule for elasticity of demand is that the seller has to bear more of the burden when the demand is elastic and the buyer bears more of the burden as the demand becomes more inelastic.  So, for both #1 and #2 in your question, the burden will be shifting from consumers to producers.  You say that the demand is becoming more elastic.  If this is so, the tax burden will be moving towards the supplier.

The rule for elasticity of supply is opposite of this.  When supply is inelastic, the seller will absorb more of the burden of the tax.  When supply is elastic, the buyer will bear more of that burden.  In #3 and #4 in your question, the supply is becoming more elastic.  This means that the buyer will end up bearing more of the burden in both cases.

Please note that the nominal incidence of these taxes does not matter.  In other words, it does not matter if the tax is imposed on the producer or on the consumer.  It is the elasticity of demand (or supply) that determines who will actually bear the burden of the tax.