A government imposes a tax on the sale of cocoa to reduce consumption for health reasons. In this market, the demand for cocoa is elastic while the supply is inelastic. How will the tax incidence be distributed between consumers and producers, and what will be the likely impact on deadweight loss?

When the government imposes a tax on cocoa, the burden of the tax is shared between consumers and producers. Since the demand for cocoa is elastic, consumers are sensitive to price changes, meaning they will likely reduce their purchases significantly if prices rise. On the other hand, the supply of cocoa is inelastic, so producers cannot easily change how much they sell in response to the tax. This situation means that consumers will bear a larger portion of the tax burden because they will still buy cocoa, but producers will take a smaller hit since they cannot easily cut back on production. As a result, the tax can create a deadweight loss, which is the loss of economic efficiency that occurs when the quantity of a good traded is reduced due to the tax, leading to fewer transactions in the market.