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?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

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.

Sources:

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user8188307's profile pic

user8188307 | (Level 1) eNoter

Posted on

Thank you so much for helping me with this question! I believe that I understand what you are saying. I want to be completely confident with my understanding of this. Would it be possible for you to give me the exact answers as the per the question for each question? These are concept questions for my class that I am hoping will help prepare me for my exam and I want to make sure I know exactly what you are saying by understanding the answers to these concepts. Can you please give me the exact answer for each of the four questions as worded in each question? I really, really appreciate you help and I am pretty positive that I understand what you explained to me.

Microsoft Word - HW4 - sp2014.docx

  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?

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