If the government places a $0.50 tax on an item for which demand is perfectly elastic
A) the entire tax will be paid by the consumer.
B) the tax will be split equally between the consumer and producer, with each paying exactly $0.25.
C) most of the tax will be paid by the consumer.
D) the entire tax will be paid by the producer.

Question

Quizplus · Accepted Answer

Since demand is perfectly elastic, the consumers' willingness to pay is exactly equal to the pre-tax price. If the producer raises the price due to the tax, consumers will find a substitute elsewhere. Therefore, producers cannot pass the tax onto consumers and will end up paying the entire amount of the tax.

If the Government Places a $0