Economics Elasticity Of Demand Questions Medium
The elasticity of demand plays a significant role in determining the incidence of a tax. The incidence of a tax refers to the distribution of the tax burden between buyers and sellers in a market.
When the demand for a good is relatively inelastic, meaning that the quantity demanded is not very responsive to changes in price, the burden of the tax tends to fall more on the consumers. In this case, even if the price of the good increases due to the tax, consumers will continue to purchase it because they have limited substitutes or necessities. As a result, the tax burden is shifted more towards the consumers, and they end up paying a larger portion of the tax.
On the other hand, when the demand for a good is relatively elastic, meaning that the quantity demanded is highly responsive to changes in price, the burden of the tax tends to fall more on the producers. In this case, if the price of the good increases due to the tax, consumers are more likely to reduce their quantity demanded or switch to substitutes. As a result, the tax burden is shifted more towards the producers, and they end up paying a larger portion of the tax.
Therefore, the elasticity of demand determines how the burden of a tax is distributed between buyers and sellers. The more inelastic the demand, the more the burden falls on consumers, while the more elastic the demand, the more the burden falls on producers.