Question

If the tax is imposed on a good where the elasticity of demand is greater than elasticity of supply show with the help of an illustration whether the producer or consumer will bear greater burden of the tax.

Answer 1

Answer - If tax is imposed on a good where the elasticity of demand is greater that the elasticity of suply, producers will bear greater burden of the tax, as the tax revenue is larger when there is more inelastic demand and supply curve.

If demand is inelastic most of the tax burden would be upon the consumers and if the supply curve is inelastic producers will bear most of the tax burden.

DIAGRAMATIC REPRESENTATION.

EXPLAINATION OF DIAGRAM.

We can see in the above diagram, according to the shaded region(Tax Burden), the difference between the equilibrium price and price paid by the producer is more than the difference between the equilibrium price and the price paid by the consumer, thus the tax paid by producers is more than the tax paid by the consumers.