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Chapter 5: Q. 20 (page 130)

Under which circumstances does the tax burden fall entirely on consumers?

Short Answer

Expert verified

When demand is more inelastic than supply

Step by step solution

01

Step 1. Definition

Tax coverage means the final tax burden or the final tax coverage. Tax coverage may be on consumers or producers. The share of the tax burden is determined by the elasticity of demand and supply of the product.

02

Step 2. Explanation

When the demand is highly inelastic to price changes, the burden of taxes would fall mostly on the consumers. This is because the producers would increase their prices and decrease in quantity demanded as result would be less proportionate.

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Most popular questions from this chapter

If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price?

What is the relationship between price elasticity

and position on the demand curve? For example, as you

move up the demand curve to higher prices and lower

quantities, what happens to the measured elasticity?

How would you explain that?

Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams

If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?

What is the formula for calculating elasticity?
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