How a more or less elastic import demand curve, as well as a more or less...

How a more or less elastic import demand curve, as well as a more or less elastic export supply curve, determines who carries the main burden of a tariff – the importing consumers or the exporting suppliers?

Expert Solution

The market is governed by the forces of supply and demand and without any outside intervention, these factors decides the equilibrium price as well as quantity. If there is any intervention in the market such imposition of tariffs then it distorts the market and affects the equilibrium as well as welfare of the society.

The tariff will be shared by the buyers and seller but the extent of that will be decided by the elasticity. If the demand is inelastic in nature as compared to the supply curve then the higher proportion of tariff will be borne by the buyers. Conversely, if the demand curve is elastic as compared to the supply curve then the seller will bear a higher proportion of the tariff. If the price elasticity of supply and price elasticity of demand has the same value then the burden of tariff will be shared equally by both the parties.

The mathematical expression can be written as follows

Tariff Incidence on Supplier = PES / (PES - PED)

Tariff Incidence on Buyer = (-PED) / (PES - PED)

PES = Price Elasticity of Supply
PED = Price Elasticity of Demand

Rahul Sunny answered 2 years ago

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