Answer to Question #182945 in Microeconomics for Noor

Question

Illustrate the impact of a specific tax imposed on producers who face a perfectly elastic demand. Who bears the burden of the tax? Would your answer change if the tax is imposed on consumers? Explain why.

Answer 1

Solution:

Perfectly elastic demand means that the quantity demanded will decrease to zero when the price increases and increase to infinity when the price decreases. There is a substantial change in quantity demanded when price changes.

When demand is perfectly elastic, a tax will result in an increase in price. Therefore, there will be a significant fall in demand. If demand is perfectly elastic, the producers will bear the burden of the tax.

The answer will not change if the tax is imposed on consumers. This is because the particular product or service tax is not a necessity and an increase in their prices will discourage consumers from purchasing them. Therefore, the producers will still bear the burden of the tax to keep their customers.