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)The demand curve is perfect elastic and 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
To justify and explain who bears the tax burden in each scenario, we need to consider the concepts of elasticity of demand and supply.
a) When the demand curve is perfectly elastic and the tax is imposed on producers, the burden of the tax falls entirely on the producers. In this case, consumers have many substitutes available, which means they can easily switch to a different product if the current one becomes more expensive due to the tax. As a result, producers cannot pass on the tax to the consumers, risking losing their market share. Therefore, the producers bear the entire burden of the tax.
b) When the demand curve is perfectly inelastic and the tax is imposed on consumers, the burden of the tax also falls entirely on the consumers. In this scenario, consumers have no substitutes available, meaning they cannot easily switch to other products even if the price increases due to the tax. As a result, they bear the entire burden of the tax and are forced to pay the higher price.
c) When both the demand and supply curves have their normal shapes and the tax is imposed on consumers, the burden of the tax is shared between the consumers and producers. The tax burden is determined by the relative elasticities of demand and supply. If demand is more elastic than supply, consumers will bear a larger share of the tax burden. Conversely, if supply is more elastic than demand, producers will bear a larger share of the tax burden. The actual division of the tax burden will depend on the specific elasticities of demand and supply.
d) When the supply curve is perfectly elastic and the tax is imposed on consumers, the burden of the tax primarily falls on the consumers. With a perfectly elastic supply, producers can easily increase their quantity supplied in response to the tax, preventing a significant increase in the price. As a result, consumers bear most of the tax burden as the price remains relatively unchanged.
e) When the supply curve is perfectly inelastic and the tax is imposed on producers, the burden of the tax falls entirely on the producers. In this scenario, producers are unable to increase their quantity supplied despite the tax, which means they cannot effectively pass on the tax to consumers through higher prices. Consequently, the producers bear the entire burden of the tax.