Consider the market to be in equilibrium with demand curve D and supply curve S.
-Refer to the diagram above.Suppose that a $1 per-unit tax is imposed on sellers.The distribution of the tax burden is such that consumers pay ________ and producers pay ________.

Question

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When a tax is imposed on sellers, the supply curve shifts upward by the amount of the tax ($1). The new equilibrium price is higher and the new equilibrium quantity is lower. The burden of the tax is shared between consumers and producers, but the distribution of the burden depends on the elasticity (responsiveness) of demand and supply. In this case, the demand is relatively inelastic and the supply is relatively elastic, meaning that consumers are less likely to change their quantity demanded and producers are more likely to change their quantity supplied in response to changes in price. As a result, consumers bear a smaller share of the tax burden (40%) and producers bear a larger share of the tax burden (60%).

Consider the Market to Be in Equilibrium with Demand Curve