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
a) When both demand and supply curves have their normal shapes and tax is imposed on consumers, the tax burden is shared between consumers and producers. Consumers will bear the majority of the burden as the demand curve is relatively inelastic, meaning that the quantity demanded is not very sensitive to changes in price. This means that the price increase due to the tax will be passed on to the consumers. Producers will also bear some of the burden as the supply curve is relatively elastic, meaning that the quantity supplied is sensitive to changes in price. This means that the price increase due to the tax will be partially passed on to the producers.
b) When the supply curve is perfectly elastic and tax is imposed on consumers, the entire tax burden is borne by the consumers. This is because the quantity supplied is infinitely elastic, meaning that the producers will not pass on any of the price increase due to the tax to the consumers. Therefore, the consumers will bear the entire burden of the tax.