Figure 18-2
-Figure 18-2 shows the widget market before and after an excise tax is imposed.What percentage of the tax per widget is borne by consumers, considering the true economic incidence of the tax?
A)0 percent
B)20 percent
C)50 percent
D)80 percent

Question

Figure 18-2 
-Figure 18-2 shows the widget market before and after an excise tax is imposed.What percentage of the tax per widget is borne by consumers, considering the true economic incidence of the tax?
A)0 percent 
B)20 percent 
C)50 percent 
D)80 percent

Quizplus · Accepted Answer

The true economic incidence of a tax does not depend solely on who officially pays the tax (i.e., whether it's levied on producers or consumers) but on the relative elasticities of supply and demand. The portion of the tax borne by consumers is determined by how much the price they pay increases as a result of the tax. If the question indicates that 80% of the tax per widget is borne by consumers, it means that the demand is relatively inelastic compared to supply, causing consumers to absorb a larger share of the tax burden.

Figure 18-2 -Figure 18-2 Shows the Widget Market Before and After an and After