Figure: Commodity Tax with Elastic Supply According to the figure, who bears the greater burden of the tax?
A) The buyer will bear the greater burden of the tax.
B) The seller will bear the greater burden of the tax.
C) The buyer and the seller will split the tax burden equally.
D) The government will bear the full burden of the tax.

Question

Figure: Commodity Tax with Elastic Supply  According to the figure, who bears the greater burden of the tax?
A) The buyer will bear the greater burden of the tax. 
B) The seller will bear the greater burden of the tax. 
C) The buyer and the seller will split the tax burden equally. 
D) The government will bear the full burden of the tax.

Quizplus · Accepted Answer

In the given figure, we see that the supply of the commodity is highly elastic as the supply curve is almost horizontal. This implies that even a slight increase in price will lead to a large increase in quantity supplied.

Now when a commodity tax is imposed, the supply curve shifts upward by the amount of the tax. This leads to an increase in the equilibrium price of the commodity, from P1 to P2. The quantity supplied also increases from Q1 to Q2.

As the supply is highly elastic, the sellers are able to increase the quantity supplied significantly in response to the increase in price. Thus, the burden of the tax falls largely on the buyers, who end up paying a higher price for the same quantity of the commodity. Thus, choice A is the correct answer.

Figure: Commodity Tax with Elastic Supply According to the Figure