📚 Learning Guide
Elasticity and Tax Incidence
hard

How does the price elasticity of demand affect the burden of a tax imposed on a good, particularly in terms of the consumer's share of the tax burden?

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Choose the Best Answer

A

If demand is elastic, consumers bear a larger burden of the tax.

B

If demand is inelastic, consumers bear a larger burden of the tax.

C

Price elasticity of demand does not affect tax incidence.

D

The burden is equally shared regardless of elasticity.

Understanding the Answer

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Answer

The price elasticity of demand measures how much the quantity demanded of a good changes when its price changes. If demand is elastic, consumers are very responsive to price changes, meaning they will buy much less if prices go up. In contrast, if demand is inelastic, consumers will continue to buy similar amounts even if prices increase. When a tax is imposed on a good, the burden of that tax is shared between consumers and producers. For example, if a tax is placed on cigarettes, which have inelastic demand, consumers will bear a larger share of the tax burden because they are less likely to reduce their purchases significantly despite the higher price.

Detailed Explanation

When demand is inelastic, consumers really need the good. Other options are incorrect because This option suggests that if demand is elastic, consumers pay more tax; This option claims that elasticity doesn't matter for tax burden.

Key Concepts

price elasticity of demand
tax incidence
consumer burden
Topic

Elasticity and Tax Incidence

Difficulty

hard level question

Cognitive Level

understand

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