A policymaker wants to tax a good but wants the incidence of that tax to fall more heavily on sellers than on buyers. What should be true about the price elasticity of supply and the price elasticity of demand in order to do this?
A) The price elasticity of demand and the price elasticity of supply should be equal.
B) The price elasticity of demand should be more elastic than the price elasticity of supply.
C) The price elasticity of demand should be less elastic than the price elasticity of supply.
D) Any value of price elasticity of demand or price elasticity of supply will meet this objective.

Question

Quizplus · Accepted Answer

When the price elasticity of demand is more elastic than the price elasticity of supply, it means that consumers are more responsive to price changes than sellers. As a result, sellers cannot easily pass the tax burden onto buyers without losing a significant amount of sales, leading to the tax incidence falling more heavily on sellers.

A Policymaker Wants to Tax a Good but Wants the Incidence