A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the diagram below. Given this information, the burden of the tax:
A) is shared about evenly between consumers and producers.
B) falls mostly on consumers.
C) falls mostly on producers.
D) cannot be determined without more information on the price elasticities of supply and demand.

Question

A specific tax will be imposed on a good. The supply and demand curves for the good are shown in the diagram below. Given this information, the burden of the tax: 
A) is shared about evenly between consumers and producers. 
B) falls mostly on consumers. 
C) falls mostly on producers. 
D) cannot be determined without more information on the price elasticities of supply and demand.

Quizplus · Accepted Answer

The burden of the tax falls mostly on producers because the supply curve shifts upward by the amount of the tax, resulting in a decrease in quantity supplied and an increase in price paid by consumers. However, the decrease in quantity supplied is relatively small compared to the decrease in quantity demanded, indicating that consumers are more sensitive to changes in price and will bear a smaller portion of the tax burden.

A Specific Tax Will Be Imposed on a Good