For a given supply curve, how does the elasticity of demand affect the excess burden of a tax imposed on a product?
A)The excess burden of the tax will be minimized when the demand is unit elastic.
B)The excess burden of the tax will be greater when the elasticity of supply is greater than the elasticity of demand.
C)The excess burden of the tax will be greater when the demand is less elastic than when it is more elastic.
D)The excess burden of the tax will be greater when the demand is more elastic than when it is less elastic.

Question

Quizplus · Accepted Answer

The excess burden of a tax is a measure of the efficiency loss incurred due to the tax. This efficiency loss occurs because some of the potential gains from trade between buyers and sellers are lost due to the tax. The greater the elasticity of demand, the more sensitive buyers are to changes in price, which means that a tax will have a larger impact on the quantity demanded. This increased impact on quantity results in a larger loss of potential gains from trade and a greater excess burden of the tax. Therefore, when demand is more elastic, the excess burden of the tax is greater.

For a Given Supply Curve, How Does the Elasticity of Demand