The elasticities of supply and demand are important in determining the distribution of tax burden because they

Question

Quizplus · Accepted Answer

The elasticities of supply and demand measure how responsive producers and consumers are to a change in price. If the demand for a good is relatively elastic (responsive to a change in price), then consumers will bear a smaller burden of the tax as they will reduce their purchases more in response to the price increase. Conversely, if the demand is relatively inelastic, consumers will continue buying the same quantity even at a higher price, and the tax burden will fall more heavily on them. Similarly, if the supply is relatively elastic, producers can adjust their output in response to the price change, whereas if it is inelastic, they will bear a larger share of the tax burden, as they cannot quickly adjust their production. Therefore, understanding the elasticities of demand and supply is crucial in determining the incidence, or distribution, of the tax burden.

The Elasticities of Supply and Demand Are Important in Determining