The demand for gasoline is highly inelastic and the supply is highly elastic. If a tax is imposed on gasoline, how will it be paid?
A) largely by the sellers of gasoline
B) solely by the sellers
C) equally by the sellers and buyers of gasoline
D) largely by the buyers of gasoline

Question

Quizplus · Accepted Answer

Since the demand for gasoline is highly inelastic, consumers are unlikely to reduce their quantity demanded by much in response to a tax increase, meaning that the majority of the tax burden (or cost of the tax) will fall on them. On the other hand, if the supply of gasoline is highly elastic, suppliers can easily adjust their production levels in response to price changes, which means that they are less likely to bear a significant portion of the tax burden. Therefore, the tax on gasoline will be largely paid by the buyers of gasoline in the form of higher prices.

The Demand for Gasoline Is Highly Inelastic and the Supply