The supply of oil is more elastic than the demand for oil. If oil is taxed $10 per barrel, how will the tax be divided between the buyers and sellers?

Question

Quizplus · Accepted Answer

When the supply of a good is more elastic than the demand for it, the burden of a tax falls more heavily on the side of the market that is less elastic—in this case, the buyers. This is because sellers, facing a more elastic supply curve, can more easily reduce the quantity they supply, pushing more of the tax burden onto buyers, who have a less elastic demand and therefore find it harder to reduce their quantity demanded in response to the tax.

The Supply of Oil Is More Elastic Than the Demand