Question

How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams

Answer 1

• Depending on the circumstance, the burden of tax can fall more on consumers or on producers.
• If demand is more inelastic than supply, consumers bear most of the tax burden, and if supply is more inelastic than demand, sellers bear most of the tax burden.

The graphs below, show how the tax burden between buyer and seller varies with the elasticity of demand and supply ;

Pb is the price buyers pay

Pm is the market price

Ps is the price sellers receive

BTB is Buyer's Tax  Burden

STB is Seller's Tax Burden

Inelastic demand,elastic supply;Buyers suffers greater tax burden.

$BTB= Pb-Pm$

Elastic demand,inelastic supply;Sellers suffers greater tax burden.

$STB = Pm-Ps$