Studies indicate the demand for cigarettes is highly inelastic, while the demand for green peas tends to be elastic. Other things constant, how will this affect the incidence of an excise tax on these products?
A) Consumers will tend to bear a greater share of the burden of an excise tax on cigarettes than of an excise tax on peas.
B) Consumers will tend to bear a greater share of the burden of an excise tax on peas than of an excise tax on cigarettes.
C) Producers will bear a greater share of the burden of an excise tax on cigarettes than of an excise tax on peas.
D) Uncertain; elasticity of demand exerts no impact on how the burden of an excise tax is distributed between consumers and producers.

Question

Quizplus · Accepted Answer

A highly inelastic demand for cigarettes means that consumers are less responsive to changes in price and will continue to purchase cigarettes even if their price increases due to an excise tax. Therefore, producers can pass on a greater share of the tax burden to consumers without significantly affecting demand. On the other hand, a relatively elastic demand for green peas means that consumers are more responsive to changes in price and may reduce their purchases significantly if there is an increase in price due to an excise tax. Therefore, producers will bear a greater share of the tax burden on green peas, as they cannot pass on the entire tax to consumers without significantly affecting demand.

Studies Indicate the Demand for Cigarettes Is Highly Inelastic, While