(Figure: The Incidence of Tax and Elasticities) Use Figure: The Incidence of Tax and Elasticities. Each panel below shows the application of a tax that raises the price from P1 to P2. When a good or service is characterized by a relatively elastic supply, as shown in panel _____, a greater share of the burden of a tax is borne by _____.
A)A; buyers
B)B; sellers
C)B; buyers
D)A; sellers

Question

(Figure: The Incidence of Tax and Elasticities) Use Figure: The Incidence of Tax and Elasticities. Each panel below shows the application of a tax that raises the price from P1 to P2. When a good or service is characterized by a relatively elastic supply, as shown in panel _____, a greater share of the burden of a tax is borne by _____. 
A)A; buyers 
B)B; sellers 
C)B; buyers 
D)A; sellers

Quizplus · Accepted Answer

When a good or service is characterized by a relatively elastic supply, a greater share of the burden of a tax is borne by buyers. This is depicted in panel A of the figure, where the demand curve is relatively steep compared to the supply curve. As a result, when the price of the good increases due to the tax, buyers are more likely to reduce their quantity demanded, causing the overall quantity of the good sold to decrease. Sellers may respond to this by lowering their prices to attract buyers, but the burden of the tax ultimately falls on buyers because they are the ones who ultimately bear the costs of the reduction in quantity.

(Figure: the Incidence of Tax and Elasticities) Use Figure: the Incidence