If asked to comment about a new tax on cotton collected from growers who do not grow their plants in the shade of other plants,an economist with no particular expertise in cotton growing might still note that

Question

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This question highlights the concept of tax incidence, which refers to who ultimately bears the burden of a tax - the party on whom the tax is legally imposed or someone else in the market. The economist notes that the legal incidence of the tax (on cotton growers who do not grow in shade) does not necessarily determine who will bear the actual burden of the tax. Depending on the elasticity of supply and demand for this cotton, some of the tax burden may be passed on to consumers through higher prices, while some may be absorbed by the producers through lower profits. Therefore, the best answer is C. Choice A may or may not be true depending on the elasticity of the supply of cotton. Choice B may or may not be true depending on the elasticity of the demand for cotton. Choice D does not reflect an understanding of tax incidence - the burden of the tax is determined by market forces, not by whether the tax is placed on buyers or sellers.

If Asked to Comment About a New Tax on Cotton