If a tax is imposed on sellers of a good, who is more affected- buyers or...

If a tax is imposed on sellers of a good, who is more affected- buyers or sellers? Can the buyers avoid the tax altogether? Use a diagram to explain.

Expert Solution

Statutory incidence of tax from the economic incidence which implies that it does not matter on whom the tax is imposed. The economic incidence which measures the effect on buyer and seller depends on the elasticity of demand and supply and not on the statutory incidence, that is, on whom it is imposed or who ends up paying it explicitly.

For fairly elastic demand and supply, both the buyer ad the sellers bear the burden of tax. However the greater is the elasticity, the lower is the tax burden. This implies that if demand is relatively elastic than supply, buyers bear a lower burden of tax and if demand is relatively inelastic than supply, buyers bear a greater burden of tax

In a special case buyers can avoid the tax altogether when the supply is perfectly inelastic so that tax burden is shifted to the sellers. Or, the demand is perfectly elastic so that once again the tax burden is shifted to the sellers. This is shown below

Rahul Sunny answered 8 months ago

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