Question

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

Answer 1

as we know the burden of tax is distributed in the market according to the elaticity of demand and supply in the market. if the demand is more elastic then the producer bears the heavy portion of tax and consumer bears less tax because elastic demand means a small change in price will cause a high change in quantity demanded so if the seller wants to shift the tax burden to the consumer the price will increase and will cause loss in revenue. the reverse is true for less elastic demand. when the elasticity is less it means increase in price will not have much of effect in consumer demand so in this case seller manage to shift a larger portion of tax on to the consumer so tax is more where eladticity is less and vice versa.