Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by
A) consumers, because the increase in market price will be large relative to the increase in the excise tax.
B) firms, because the increase in market price will be large relative to the increase in the excise tax.
C) consumers, because the increase in market price will be small relative to the increase in the excise tax.
D) firms, because the increase in market price will be small relative to the increase in the excise tax.

Question

Quizplus · Accepted Answer

When the demand for a good is relatively inelastic, the quantity demanded does not change significantly in response to a change in price. Therefore, when the excise tax on cigarettes increases, the market price will also increase by a large amount. Since the quantity demanded will not decrease significantly, consumers will end up paying most of the tax increase through higher prices. Thus, the short-run burden of the tax increase will be borne primarily by consumers.

Suppose There Is an Increase in the Excise Tax Imposed