Suppose the government imposes a tax of $10 on every pair of shoes sold be every...

Suppose the government imposes a tax of $10 on every pair of shoes sold be every seller in Canada. Will the $10 be paid by the seller, the buyer or both? How does the price elasticity of demand affects the incidence of this tax on buyers and sellers?

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Answer

The tax of $10 on every pair of shoes sold may be paid either by the buyer, or the seller or both, depending upon the elasticity of demand and supply.

If demand is inelastic, a higher tax will cause only a small fall in demand. Most of the tax will be passed onto consumers. When demand is inelastic, governments will see a significant increase in their tax revenue.

If demand is elastic, then an increase in price will lead to a bigger percentage fall in demand. In this case, the producer burden is greater than the consumer burden. The tax will be more effective in reducing demand, but less effective in raising revenue for the government.

Rahul Sunny answered 1 year ago

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