Question

2. Based on the economics of tax incidence, discuss how the intensity of protest over imposition of the excise tax on whiskey to pay for the national debt incurred during the U.S. Revolutionary War may be related to the supply and demand elasticities of whiskey during the late 1700’s. Assume that the demand for whiskey was elastic during the late 1700’s and that the supply of whiskey produced in the frontier regions of the country was inelastic during this time period.

Answer 1

Ans) When government imposes tax, it does not really matter upon whom the tax is imposed. Burden of tax is shared by both buyers and sellers. Now who will bear greater burden of tax depends upon the elasticity of demand and supply. Accordingly, less elastic side of the market bears greater burden of tax.

This burden of tax is known as incidence of tax.

Here, since demand was more elastic, buyers bear less burden of tax while supply is inelastic and therefore, sellers will bear greater burden of tax. This will hurt the owners as well as the workers. So, they will protest to decrease the tax.

(We haven't assumed any side to be Perfectly elastic or inelastic. If supply were to be Perfectly inelastic, all the burden Of tax will fall upon the producers.)

burden of tax on buyers price paid by buyers after tax tax wedge When supply is less elastic burden of tax on sellers price received by sellers after tax