Question

Use the idea of elasticity of demand , and the nature of the demand curve to determine who pays a lion’s share of a tax paid by the consumers. Draw a graph to illustrate your answer.

Answer 1

The tax burden is shared by the sellers and buyers based on the prevailing elasticities of demand and supply.

The higher burden on seller: Sellers will bear a higher burden of tax if demand is more elastic relative to the supply of goods.

The higher burden on the buyer: if demand is inelastic relative to the supply elasticity. A large burden of tax shall be faced by the buyers.

the tax would be shared equally if demand and supply elasticities are equal.

Following is the diagram:

S-tax Buyers' share of tax burden Price if no tax- Sellers' share of tax burden

In the above diagram, the supply curve is less elastic, hence when tax is imposed by the government. The supply curve shifts to the left and the larger burden of tax is shared by the seller.