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
explaining who bears the tax burden when;
a)Thedemandcurveisperfectelasticand tax isimposed on producers
b)The demand curve is perfect inelastic and tax is imposed on consumers
c) Both demand and supply curves have their normal shapes and tax is imposed on consumers
d)The supply curve is perfect elastic and tax is imposed on consumers
e)The supply curve is perfect inelastic and tax is imposed on producers
a) When the demand curve is perfectly elastic and the tax is imposed on producers, the burden of the tax will entirely fall on the producers. This is because when the demand curve is perfectly elastic, even a slight increase in price will cause consumers to switch to substitute goods or services. Producers, therefore, cannot pass on the tax to consumers by increasing the price, as it would lead to a significant decline in demand. As a result, producers will have to bear the entire burden of the tax.
b) In the case where the demand curve is perfectly inelastic and the tax is imposed on consumers, the burden of the tax will fall entirely on the consumers. When the demand curve is perfectly inelastic, it means that consumers are not sensitive to changes in price. Therefore, even if the tax increases the price, consumers will continue to purchase the same quantity of goods or services. As a result, producers can pass on the burden of the tax to consumers by increasing the price, and consumers will bear the entire tax burden.
c) When both the demand and supply curves have their normal shapes and the tax is imposed on consumers, the burden of the tax will be shared between consumers and producers. The extent to which each party bears the burden depends on the relative elasticities of demand and supply. If the demand is more elastic than the supply, consumers will bear a larger portion of the tax burden. Conversely, if the supply is more elastic than the demand, producers will bear a larger portion of the tax burden.
d) When the supply curve is perfectly elastic and the tax is imposed on consumers, the burden of the tax will entirely fall on the consumers. With a perfectly elastic supply curve, producers can increase their quantity supplied without increasing the price, regardless of the tax. As a result, producers will not bear any burden of the tax, and consumers will solely bear the tax burden.
e) Finally, when the supply curve is perfectly inelastic and the tax is imposed on producers, the burden of the tax will solely fall on the producers. With a perfectly inelastic supply curve, producers are unable to respond to increases in the tax by adjusting their quantity supplied. As a result, they are unable to pass on the tax burden to consumers through price increases, and consequently, producers bear the entire burden of the tax.