Graphically explain tax incidences (who bears the burden)under the following scenarios:
a)Perfect inelastic demand curve and normal supply curves
b)Perfect elastic demand curve and normal supply curves
c)Perfect inelastic supplycurve and normal demand curves
d)Perfect inelastic supplycurve and normal demand curves
e)The demand curve is perfect elastic and tax is imposed on producers
To graphically explain tax incidences or who bears the burden of a tax, we need to understand the concepts of demand and supply curves and how they interact with taxes. Assume a hypothetical market for a specific product.
a) Perfect inelastic demand curve and normal supply curves:
In this scenario, the demand for the product is considered perfectly inelastic. This means that regardless of price changes, consumers' demand remains the same. On the other hand, the supply curves are normal, meaning they respond to changes in price.
Tax incidence: Since the demand is perfectly inelastic, consumers cannot adjust their consumption in response to a price change caused by the tax. Therefore, the entire burden of the tax falls on the consumers. The graph would show a vertical demand curve and an upward shift in the supply curve, resulting in an increase in price paid by consumers.
b) Perfect elastic demand curve and normal supply curves:
Here, the demand curve is perfectly elastic, indicating that consumers are highly responsive to price changes, and even a small increase in price would cause a significant decrease in demand. The supply curves are still normal.
Tax incidence: In this case, consumers have a lot of alternatives available, and they can easily switch to substitute products if the price increases due to the tax. As a result, the burden of the tax falls entirely on the producers. The graph would show a horizontal demand curve and an upward shift in the supply curve, leading to a decrease in the price received by producers.
c) Perfect inelastic supply curve and normal demand curves:
When the supply curve is considered perfectly inelastic, it implies that producers cannot adjust their production levels in response to changes in price. On the other hand, the demand curves remain normal.
Tax incidence: Since the supply is perfectly inelastic, producers cannot bear any portion of the tax burden. Consumers, therefore, bear the entire burden of the tax. This would be shown on the graph with a vertical supply curve and an upward shift in the demand curve, leading to an increase in price paid by consumers.
d) Perfect elastic supply curve and normal demand curves:
In this scenario, the supply curve is perfectly elastic, indicating that producers can easily adjust their production levels in response to price changes. The demand curves are still normal.
Tax incidence: In this case, producers can easily adjust their production levels to avoid the tax burden, shifting it entirely to the consumers. The graph would show a horizontal supply curve and an upward shift in the demand curve, resulting in an increase in the price paid by consumers.
e) The demand curve is perfectly elastic, and tax is imposed on producers:
If the demand curve is perfectly elastic, it means that consumers are highly responsive to price changes, and any increase in price would cause them to completely stop buying the product. In this scenario, the tax is imposed on producers.
Tax incidence: Since the demand is perfectly elastic, producers cannot pass on the burden of the tax to consumers without losing all their sales. Therefore, producers bear the entire burden of the tax. The graph would show a horizontal demand curve and an upward shift in the supply curve, leading to a decrease in the price received by producers.
These are the graphical explanations of tax incidences under different scenarios based on the characteristics of demand and supply curves.