FIGURE 18-3
-Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P2, the direct burden of the tax is
A) the area DEFB.
B) the area P1FBP2.
C) the area P1CBP4.
D) the area BFC.
E) zero.

Question

FIGURE 18-3
-Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P2, the direct burden of the tax is
A) the area DEFB. 
B) the area P1FBP2. 
C) the area P1CBP4. 
D) the area BFC. 
E) zero.

Quizplus · Accepted Answer

When supply is perfectly elastic, all of the tax burden falls on the supplier. The increase in price from P1 to P2 is fully passed on to the consumer, so the consumer pays the entire tax. The direct burden of the tax is the difference between the price paid by the consumer after the tax (P2) and the price the consumer would have paid without the tax (P1). This is represented by the area P1FBP2, so the correct answer is B.

FIGURE 18-3 -Refer to Figure 18-3. Suppose That Supply Is Perfectly Elastic