A tax imposed on a market with an inelastic demand and an elastic supply with cause:
A)sellers to pay the majority of the tax
B)buyers to pay the majority of the tax
C)the tax burden to be equally devided between buyers and sellers
D)the tax burden to be divided, but it cannot be determined how
To determine the answer to this question, we need to understand the concept of elasticity of demand and supply and how it relates to the burden of a tax.
Elasticity measures the responsiveness of quantity demanded or supplied to a change in price. When demand or supply is elastic, it means that a small change in price leads to a relatively larger change in quantity demanded or supplied. In contrast, when demand or supply is inelastic, it means that a change in price does not significantly affect the quantity demanded or supplied.
In this case, we are told that the market has an inelastic demand and an elastic supply. Let's examine the possible outcomes:
A) Sellers pay the majority of the tax:
If supply is elastic and demand is inelastic, sellers have more flexibility to adjust their quantity supplied in response to the tax. Since buyers have a more limited response in terms of quantity demanded, sellers can pass on a greater proportion of the tax burden to buyers by increasing the price. Therefore, this option is incorrect.
B) Buyers pay the majority of the tax:
If demand is inelastic and supply is elastic, buyers have more flexibility to adjust their quantity demanded in response to the tax. Since sellers have a more limited response in terms of quantity supplied, buyers can push for lower prices, effectively forcing the sellers to absorb a larger portion of the tax burden. Therefore, this option is correct.
C) The tax burden is equally divided between buyers and sellers:
This option assumes that both demand and supply are equally elastic or inelastic. However, the question specifically states that demand is inelastic and supply is elastic, indicating that the burden is likely to be shared asymmetrically. Therefore, this option is incorrect.
D) The tax burden is divided, but it cannot be determined how:
While it is true that the burden of a tax is ultimately shared between buyers and sellers, the specific circumstances described here, with inelastic demand and elastic supply, point to buyers paying the majority of the tax burden. Therefore, this option is incorrect.
In conclusion, based on the information provided, option B is the most likely answer: buyers will pay the majority of the tax.