If elasticity of demand is 0.2, elasticity of supply is 0.6, and a 10 percent excise tax is levied on the good:
A) consumers pay 25 percent of the tax.
B) sellers pay 25 percent of the tax.
C) consumers pay 20 percent of the tax.
D) sellers pay 60 percent of the tax.

Question

Quizplus · Accepted Answer

The tax burden is shared between consumers and sellers based on the relative elasticities of demand and supply. The formula for the tax burden on sellers is Es/(Es + Ed), where Es is the elasticity of supply and Ed is the elasticity of demand. Here, it is 0.6/(0.6 + 0.2) = 0.6/0.8 = 0.75, meaning sellers pay 75% of the tax, not 25%. Therefore, the correct answer is that sellers pay 25% of the tax, which is option B.

If Elasticity of Demand Is 0