Assume the Environmental Protection Agency imposes an excise tax on polluting firms. In which of the following situations would we expect the additional costs to be borne most heavily by consumers?

Question

Quizplus · Accepted Answer

When demand is highly inelastic and supply is highly elastic, the polluting firms are able to pass on most of the tax burden to the consumers in the form of higher prices. This is because consumers are not very sensitive to changes in price (inelastic demand) and the firms are able to adjust their production to avoid the tax (elastic supply).

Assume the Environmental Protection Agency Imposes an Excise Tax on Polluting