Question

In a market where the supply curve is elastic or inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold? Why?

Answer 1

Whenever there is a tax imposed in the market for a particular good, the tax is shared between the buyer and the seller when the demand and supply curves are fairly elastic. There are cases where the tax is entirely born by one of the market participants. this happens when the demand for the supply curve are perfectly elastic or inelastic

Buyers pay a higher price and purchase a lower quantities whenever a tax is imposed. This is because excise tax decreases market supply and shifts the supply curve to the left. there is an increase in the price paid by the buyer and a decline in the price received by the seller. The quantity purchased also decreases following the law of demand.

This indicates that sharing of tax burden depends upon the elasticity of demand and supply. When the demand is perfectly elastic or supply is perfectly inelastic, the entire tax is borne by the seller. in contrast when the demand is perfectly inelastic or the supply is perfectly elastic the entire tax is borne by the buyer. In case the demand is relatively inelastic than supply, the tax burden lies more on the buyer. When demand is relatively elastic than supply tax burden lies more on the seller

Therefore the conclusion is that the less elastic side of the market shares a greater tax burden.