Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Tax incidence falls entirely on consumers, reducing consumer surplus significantly.
B
Tax incidence falls entirely on producers, leaving consumer surplus unchanged.
C
Tax incidence is shared between consumers and producers, leading to a decrease in consumer surplus, especially if demand is inelastic.
D
Tax incidence has no effect on consumer surplus if demand is perfectly elastic.
Understanding the Answer
Let's break down why this is correct
Answer
The elasticity of demand measures how much the quantity demanded of a good changes when its price changes. When a tax is imposed on a good, if the demand is elastic, consumers will reduce their purchases significantly, meaning they bear less of the tax burden. For example, if a luxury item like a designer handbag is taxed, people may choose not to buy it, so the seller absorbs more of the tax. On the other hand, if the demand is inelastic, like for essential medicines, consumers will continue to buy nearly the same amount, leading them to pay a larger share of the tax. This situation can decrease consumer surplus, which is the benefit consumers get from purchasing a good for less than they are willing to pay, especially if the demand shifts and prices rise due to the tax.
Detailed Explanation
When demand is inelastic, consumers are less sensitive to price changes. Other options are incorrect because This suggests consumers pay all the tax, which isn't true; This implies producers take all the tax burden, which is incorrect.
Key Concepts
Tax incidence
Consumer surplus
Shifts in demand.
Topic
Elasticity of Demand and Taxation
Difficulty
hard level question
Cognitive Level
understand
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