The more price-elastic the demand, the greater the portion paid by producers for a per-unit tax on a good.

Question

Quizplus · Accepted Answer

This statement is true according to the basic economics principle of tax incidence. When demand for a good is elastic, consumers are more sensitive to changes in price and react by reducing their quantity demanded. This puts pressure on producers to absorb more of the tax burden in order to keep prices from increasing too much and further decreasing demand. Conversely, when demand is inelastic, consumers are less responsive to price changes and continue to purchase the good even with a higher price due to the tax, meaning that producers are able to pass on more of the tax burden to consumers.

The More Price-Elastic the Demand, the Greater the Portion Paid