The ultimate burden of a tax falls most heavily on the side of the market that is less elastic.

Question

Quizplus · Accepted Answer

When a tax is imposed, both the buyers and sellers will share the burden of the tax in proportion to their elasticities of demand and supply, respectively. The side of the market that is less elastic will bear a greater burden of the tax. This is because they are less responsive to changes in price, so they are less likely to adjust their behavior in response to the tax. Meanwhile, the more elastic side of the market can more easily find substitutes or alternative suppliers/buyers, and thus can shift some of the burden of the tax onto the less elastic side.

The Ultimate Burden of a Tax Falls Most Heavily on the Side