Consider an excise tax imposed on daily parking charges in the downtown of a small city.Before the imposition of the tax,equilibrium price and quantity are $15 and 100 cars parked per day.(P = $15,Q = 100).The city government then imposes a tax of $3 per car parked per day.Market equilibrium adjusts to P = $16 and Q = 95.Which of the following statements about the burden of the tax is correct?
A)Supply is less elastic relative to demand and therefore more of the burden falls on the consumer.
B)Supply is more elastic relative to demand and therefore more of the burden falls on the seller.
C)Supply is more elastic relative to demand and therefore more of the burden falls on the consumer.
D)Supply is less elastic relative to demand and therefore more of the burden falls on the seller.

Question

Quizplus · Accepted Answer

When supply is less elastic relative to demand, the burden of the tax falls more heavily on the seller since the seller has less flexibility to adjust their prices in response to the tax. In this case, the price only increased by $1 even though the tax was $3, which suggests that the sellers (parking lot operators) had to absorb some of the tax burden themselves instead of passing it on completely to consumers. This is consistent with supply being less elastic relative to demand.

Consider an Excise Tax Imposed on Daily Parking Charges in the Downtown