In perfectly competitive markets with identical firms, the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.

Question

Quizplus · Accepted Answer

When a tax is imposed on a perfectly competitive market with identical firms, the price of the product increases, which reduces the quantity demanded by consumers. As a result, the market demand becomes less elastic, and producers are not able to shift the entire burden of the tax onto consumers. Therefore, both producers and consumers share the burden of the tax in the short run.

In Perfectly Competitive Markets with Identical Firms, the Burden of a Tax