Answer to Question #300633 in Microeconomics for nur

Question

The incidence of a tax any economic agent in a competitive market depends largely upon the elasticity of supply and demand of the factor. So graphically show these impacts and the burden shared by buyer and seller of the factor if an amount of $X is imposed. Draw all possible situation while ringing change in the Supply curve. Also graphically indicated what will be the net burden of tax if the tax is imposed either on consumer side or on the producer side. Make a parallel comparison.

Answer 1

Generally, when tax is increased the prices of the commodities goes high by the value equivalent to the tax.

In Diagram (a) in a market with inelastic supply and elastic demand, customers may opt not to buy the goods and services at that time due to high prices. Therefore, the supplier is forced to retain their initial prices, disproportionately bearing all the tax burden to retain their customers.

In diagram (b) in market elastic supply and inelastic demand, the customers must purchase the goods and services regardless of the changes in price. Therefore, the suppliers impose the tax burden on the buyers.