In a particular market, suppose that without any taxes or price controls in place the market...

In a particular market, suppose that without any taxes or price controls in place the market price would be P₀=8. All else the same, with a per unit tax of T=2 levied on buyers, the market price is P₁ = 6.50. At P₀=8, is supply or demand more elastic? Justify answer.

Expert Solution

Post-tax levied on buyers,

Suppliers are getting $6.50

Buyers are paying $6.50 + 2 = $8.50

This means burden of tax on buyers = $8.50 - $8 = $0.50 and burden of tax on sellers = $8 - $6.50 = $1.50

This means the suppliers are bearing more burden than buyers.

This means supply is inelastic in nature and demand is more elastic in nature.

Rahul Sunny answered 2 years ago

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