Question

1. If government places a per-unit tax or an emission charge on a product, the producer tries to force the consumers to pay the majority of the tax. What type of elasticity must the supply curve have for the producers to successfully shift the burden of the tax to the consumers? Show graphically and explain why your answer is correct. Label your curves, axes, equilibrium prices and quantities before and after the tax is placed, producer price and the burden to consumers and the burden to producer areas. (15 points)

Answer 1

If the government places a per unit tax or an emission charge on a product and the producers tries to force the consumers to pay the majority of the tax, the type of elasticity the supply curve must have is elastic supply for the producers to successfully shift the burden of the tax to the consumers. This is because sellers react more to changes in prices than the consumers and since the consumers don't decrease their demand as much as the increase in the price, so the sellers tries to shift most of the tax burden to the consumers.

In the graph below, the vertical axis is Price and the horizontal axis is Quantity. The equilibrium price is P^* and the equilibrium quantity is Q^* before the tax is placed and after the tax is placed, the Price that consumers pay is P_c and the price that producers pay is P_p and Q_T is the equilibrium quantity after tax. The purple shaded area is the burden to the producers and the blue shaded area is the burden to the consumers.

PRICE Pc TAX px 尸 GUAN TITY