It is argued that “Elasticity of demand and supply curves determines who bears the tax
burden regardless of whether a tax was imposed on consumers or producers” Justify by
explainingwhobears the tax burden when;
a)Both demand and supply curves have their normal shapes and tax is imposed on consumers
b)Thesupplycurveisperfectelasticandtaxis imposed on consumers
c)The supply curve is perfect in elastic and tax is imposed on producers
To determine who bears the tax burden, we need to consider the concept of elasticity of demand and supply curves. Elasticity is a measure of responsiveness to price changes.
a) When both the demand and supply curves have their normal shapes and a tax is imposed on consumers:
In this scenario, the tax burden is shared between consumers and producers. The tax effectively decreases the amount of money consumers are willing to spend, leading to a decrease in demand. As a result, consumer surplus decreases and producer surplus increases. However, the burden of the tax tends to be more on consumers because they typically have less elasticity of demand compared to producers. This means that consumers are less responsive to price changes, and therefore the burden of the tax is shifted more towards them.
To illustrate this, let's consider an example: Suppose the government imposes a tax on a specific product such as cigarettes. The tax increases the price of cigarettes, leading to a decrease in the quantity demanded. Even though producers may initially pay the tax to the government, over time they can shift some of the burden onto consumers by increasing the price of cigarettes. As consumers have a relatively inelastic demand for cigarettes (as they may be addicted or have limited substitutes), they end up paying a greater portion of the tax burden.
b) When the supply curve is perfectly elastic and the tax is imposed on consumers:
A perfectly elastic supply curve means that producers can supply any quantity at a constant price. In this case, the burden of the tax falls entirely on consumers. Since producers can adjust their prices without any constraints, they will increase the price by the full amount of the tax imposed. As a result, consumers bear the entire burden of the tax through higher prices.
c) When the supply curve is perfectly inelastic and the tax is imposed on producers:
A perfectly inelastic supply curve means that producers are unable to respond to changes in price, and the quantity supplied remains constant. In this scenario, the entire tax burden falls on producers. Since they cannot adjust their quantity supplied, they have to bear the full cost of the tax. Consumers, on the other hand, do not experience any change in price or quantity and thus do not bear any of the tax burden.
In summary, the elasticity of demand and supply curves plays a crucial role in determining the distribution of the tax burden. When demand is relatively inelastic compared to supply, consumers bear a larger portion of the tax burden. Conversely, when supply is inelastic compared to demand, producers bear a larger portion of the tax burden. When the curves have different elasticities or unique characteristics, the tax burden is shared accordingly.