For a given supply curve, how does the elasticity of demand affect the burden of a tax imposed on a product?
A)The excess burden of the tax will be minimized when the demand is unit elastic.
B)The excess burden of the tax will be greater when the elasticity of supply is greater than the elasticity of demand.
C)The excess burden of the tax will be greater when the demand is less elastic than when it is more elastic.
D)The excess burden of the tax will be greater when the demand is more elastic than when it is less elastic.

Question

Quizplus · Accepted Answer

When the demand is more elastic, consumers are more sensitive to changes in price, so they will reduce their consumption more in response to the tax. This means that the burden of the tax will fall more heavily on producers, who will have to lower their prices to entice consumers to buy. As a result, the deadweight loss (or excess burden) of the tax will be greater. When the demand is less elastic, consumers are less responsive to changes in price, so the burden of the tax falls more heavily on them. This means that producers do not have to lower their prices as much, and the deadweight loss of the tax will be smaller. Therefore, the excess burden of the tax will be greater when the demand is more elastic than when it is less elastic.

For a Given Supply Curve, How Does the Elasticity of Demand