Suppose the demand for prescription drugs is relatively inelastic. If the supply of prescription drugs is elastic and a tax is imposed in this market, who will bear the greater burden of the tax?
A)consumers
B)producers
C)both consumers and producers equally
D)the government

Question

Quizplus · Accepted Answer

When the demand for a good is inelastic and the supply is elastic, the burden of a tax falls more heavily on consumers rather than producers. This is because consumers are less responsive to changes in price, so they will bear most of the burden of the tax as they will continue to demand the same quantity of prescription drugs even though the price has increased. Producers, on the other hand, can shift some of the burden to consumers by decreasing the quantity supplied and raising prices, but they are ultimately limited by the elasticity of supply. The government will also receive some revenue from the tax.

Suppose the Demand for Prescription Drugs Is Relatively Inelastic