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How does the incidence of a tax use the price elasticity of supply and demand?

Answer:

If the demand is perfectly elastic in prices (that is, demand falls to zero if the price for consumers is raised even the slightest bit), then the entire tax incidence falls on the producer since the producer would rather face the entire tax burden than lose all his consumers. And if the demand is perfectly inelastic (doesn't change with change in commodity price) then the entire burden falls on the consumers.
So higher the price elasticity of demand, higher would be the share of taxes borne by the producer. And higher the price elasticity of supply, lower the share borne by the producer, by similar logic.

First answer by ID3716661691. Last edit by ID3716661691. Question popularity: 21 [recommend question].

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