Economics Elasticity Of Demand Questions Medium
The elasticity of supply plays a crucial 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 supply is elastic, it means that producers can easily adjust their quantity supplied in response to changes in price. In this case, if a tax is imposed on the sellers, they can shift a significant portion of the tax burden onto the buyers by increasing the price of the product. This happens because the sellers can easily reduce their quantity supplied without incurring significant costs, and as a result, the buyers end up paying a higher price.
On the other hand, when the supply is inelastic, it means that producers are unable to adjust their quantity supplied in response to price changes. In this case, if a tax is imposed on the sellers, they are not able to shift the tax burden onto the buyers as easily. The sellers may have to bear a larger portion of the tax burden themselves, resulting in a smaller increase in price for the buyers.
Therefore, the more elastic the supply, the easier it is for sellers to pass on the tax burden to buyers, resulting in a higher incidence of the tax on the buyers. Conversely, when the supply is inelastic, the sellers bear a larger portion of the tax burden, leading to a lower incidence of the tax on the buyers.