Question

1. Suppose that the citizens of Hungary can purchase all the oil they desire at the going international price (the supply curve of oil is perfectly elastic). If the Hungarian government levies a tax on oil, who bears the burden? Illustrate your answer with a supply and demand diagram. Assume the demand curve is downward sloping.

Answer 1

The d=supply is perfectly elastic here so if the government impose a tax on the oil, the whole tax burden will be born by the consumers as a form of increased price. This is illustrated with the help of the diagram below.

The supply curve is perfectly elastic and that is shown by the horizontal supply curve , the perfectly elastic supply curve tells us that if the price goes below the price P no producers will supply at the market. The demand curve is downward sloping showing the negative relationship between the price and the quantity demanded. When there is a tax the supply curve shifts upward equally to that amount, the government revenue is collected is shown by the blue shaded area and the dead weight loss is orange. When the there is a tax it is fully reflected in the price , so the consumers bear the whole tax burden.