Consider an excise tax imposed on daily parking charges in the downtown of a small city.Before the imposition of the tax,equilibrium price and quantity are $15 and 100 cars parked.(P = $15,Q = 100).The city government imposes a tax of $3 per car parked per day.Market equilibrium adjusts to P = $16 and Q = 95.Which of the following statements about the burden of the tax is correct?
A)Supply is more elastic relative to demand and therefore more of the burden falls on the consumer.
B)Supply is more elastic relative to demand and therefore more of the burden falls on the seller.
C)Supply is less elastic relative to demand and therefore more of the burden falls on the consumer.
D)Supply is less elastic relative to demand and therefore more of the burden falls on the seller.

Question

Quizplus · Accepted Answer

The fact that the equilibrium quantity decreased after the tax was imposed suggests that demand is relatively inelastic. This means that consumers are willing to pay a higher price to park downtown, even with the tax. Since supply is more inelastic than demand (shown by the smaller decrease in quantity relative to the increase in price), the burden of the tax falls more on the seller. Therefore, choice D is correct.

Consider an Excise Tax Imposed on Daily Parking Charges in the Downtown