Question

Consider the market for gasoline, illustrated in the figure to the right. 

Suppose the government adds a $1.50 per gallon excise tax on gasoline, which shifts the supply curve from S1 to S2, as illustrated. 

What is the tax incidence? 

Consumers pay $ _______  of the tax and producers pay $_______ of the tax. (Enter your responses rounded to two decimal places.) 

When the demand for a product is more elastic than supply, consumers pay _______  of the tax on the product. 

Answer 1

Before the tax was imposed both buyers and sellers were paying a price of $2 per unit. After the tax consumers are paying $3 per unit while sellers are receiving $1.50 per unit. This shows that the price that the buyers are paying increases by $1 and the price that sellers are receiving reduces by 50 cents.

This implies that consumers are paying $1 of tax and producers are paying $0.50 of the tax amount.

When demand is more elastic, the share of consumer in the tax amount is lower than the share of producer. This is because the less elastic side of the market bears a greater burden of tax.

Minority word is correct