Question

3 Graph (20 points) Use Demand and supply diagram and draw graphs to explain why the burden of tax falls more heavily on the side of the market that is less elastic.

Answer 1

If demand is either inelastic or less elastic the consumer always pays for excess burden of tax. For example in case of cigarette smoking when supplier raises prices due to higher taxes on them, they simply pass on the tax burden onto consumers by raising prices. As results demand does not change due to prices because consumers are addicted to smoking and hence bear the excess burden. Some part of excess burden due to lower quantities supplied and higher prices is also borne by supplier as shown below. Total excess burden is given by Triangle ABC Below.