Question

When the government decides to impose a tax on sellers of a good or service, sellers try to pass the tax on to consumers by raising the price of the good being sold. Assume the government decides to place a $1 tax on each unit of a good sold, e.g., tires. Using the simple model of supply and demand, describe what would happen to the price and quantity of tires sold. Would the amount of tax paid by the consumer (as opposed to the producer) be greater when demand is elastic or inelastic? Why?

Answer 1

When demand is elastic then more tax is borne by producer because increase in price decreases quantity by more proportion if more tax is charged by consumer.

When demand is inelastic then more tax is borne by consumer because increase in price decreases quantity demanded by less amount.