Assume a particular type of alcohol is produced in a perfectly competitive market.Its demand is highly inelastic while its supply is highly elastic.The burden of a $2 excise tax on each bottle of this alcohol will therefore be:

Question

Quizplus · Accepted Answer

Since the demand is highly inelastic, buyers are less likely to change their quantity demanded in response to the increase in price due to the excise tax. Therefore, the burden of the tax will fall primarily on buyers in the form of higher prices. In contrast, the highly elastic supply means that producers can easily adjust their production to the new market conditions, which will lead to a smaller increase in price for consumers and a larger decrease in price received by producers. Thus, the burden of the tax will be primarily on buyers.

Assume a Particular Type of Alcohol Is Produced in a Perfectly