Question

Panel (a) Price Panel (b) Supply Supply Demand Demand 1 2 3 4 5 6 7 8 Quantity 1 2 3 4 5 6 7 8 Quantity 6. In which of the panels in the figure do the buyers bear the greater tax incidence, and why is this? a) Panel(a), because the demand curve is relatively less elastic, meaning consumers are less willing to bear the burden of the tax. b) Panel (b), because the demand curve is relatively less elastic, meaning consumers are less willing to bear the burden of the tax c) Panel (o), because supply is relatively more elastic, meaning suppliers have relatively more options for how to deploy their resources than buyers have substitution possibilities, requiring them to bear the greater burden. d) Panel (b), because supply is relatively more elastic, meaning suppliers have relatively more options for how to deploy their resources than buyers have substitution possibilities, requiring them to bear the greater burden. 7. In which panel is the dead weight loss greater, and why? a) Panel (a). The supply curve is identical in both panels, but the demand curve is relatively more elastic in panel fal, and the greater the elasticity on either side of the market the greater the dead weight loss, b) Panel (b). The demand curve is identical in both panels, but the supply curve is relatively more elastic in panel (b), and the greater the elasticity on either side of the market the greater the dead weight loss, d The tax is $2 in each panel, so therefore the dead weight loss will be the same in each ) Panel (b). The demand curve is identical in both panels, but the supply curve is relatively less elastic in panel b) and the less the elasticity on either side of the market the greater the dead weight loss

Answer 1

Answer

6. d) Panel (b), because supply is relatively more elastic, meaning suppliers have relatively more options for how to deploy their resources than buyers have substitution possibilities,requiring them to bear greater burden.

1 Price Panel (b) Supply Demand 2 3 5 6 7 8 Quantity

When the government imposes tax on a good, how the burden of tax will fall on the buyers and the producers, depend on the price elasticity of demand for the good and the supply of the good. If the supply curve is more elastic than the demand curve, the burden of tax fall more on the buyers. When the tax is imposed on a good, the price of the good rises.The higher price elasticity of supply means the producers or sellers are more responsive to the price change , and have more options to deploy their resources. On the other hand, the relatively less elastic demand curve means the buyers are less responsive to the price change, because the good is necessary to them and have limited substitutes. So the buyers have limited or no options but to purchase the good even if its price rises. Thus the tax burden falls more on the buyer.

In the figure above, before the tax is imposed,the market equilibrium price was $4(where quantity supplied= quantity demanded). After the imposition of tax, the price rises. The total tax imposed is 'MV' of which the buyers bear 'MN' portion of tax, and the sellers bear 'NV' portion of tax.

MN $>$ NV

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7. b) Panel (b). The demand curve is identical in both panels, but the supply curve is relatively more elastic in panel (b), and the greater the elasticity on either side of the market, the greater the deadweight loss.

Panel (a) 1 Price Panel (b) Supply Supply Demand Demand 6 7 8 Quantity 3 4 5 6 7 8 Quantity

The deadweight loss depends on the price elasticity of demand, and supply.The higher the price elasticity of demand and/or supply, the higher is the deadweight loss, because the higher price elasticity of demand and supply means the demand and supply are more responsive to the price change. In the figure above, the demand curve is identical in both the panels. So the price elasticity of demand is same in both. In case of supply curve, we see that in panel(b), the supply curve is more elastic than in panel(a). So the quantity supply is more responsive to the price change in panel(b) than in panel(a). This is the reason, when tax is imposed on the good, the deadweight loss in panel(b) is greater than the deadweight loss in panel(a). In panel(b), the deadweight loss is the purple color triangle 'TVN' , and in panel(a), the deadweight loss is the orange color triangle 'MXF'.

'TVN' $>$ 'MXF'

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