Question

People that have not studied economics often assume that because taxes appear to be collected from buyers, they must be paid by the buyers. Our analysis of taxes suggests something different. Suppose that the government opts to levy a tax on sugar. Suppose that the tax is $1 per pound. Carefully explain why the price of sugar probably rises by less than $1 per pound.

Answer 1

Ans. When a $1 tax is imposed on sugar then, the buyers have to more price for sugar but becasue demand for sugar is not perfectly elastic, so, some buyers leave the market at this increased price, so, quantity demanded falls. This fall in quantity demanded for given supply leads to a decrease in price. So, price falls by an amount less than $1 if the supply of sugar is nor perfectly inelastic and equal to $1 if supply of sugar is perfectly elastic. So, both buyers and sellers bear the burden of the tax buth the size of tax depends on the relative elasticity of demand and supply, if elasticity of supply is more than the elasticity of demand, then buyer have to pay major portion of the tax while if ealsticity of demand is more than the supply, then sellera pay majority of the tax. This is also evident from the below mentioned formula.

The formula for the proportion of tax burden on buyers = Price elasticity of supply/ (Price elasticity of demand + Price elasticity of supply)