In the case of a per-unit tax on a good, which of the following situations will lead to the greatest change in price?

Question

Quizplus · Accepted Answer

When demand is relatively inelastic and supply is relatively elastic, the tax burden falls mostly on the producer, leading to a larger increase in price. This is because producers have less flexibility to adjust their supply in response to the tax, while consumers are less sensitive to changes in price. In contrast, when both supply and demand are relatively elastic, both producers and consumers have more flexibility to adjust their behavior in response to the tax, leading to a smaller overall change in price.

In the Case of a Per-Unit Tax on a Good