-Refer to above figure in which negative externality existed. The government imposes a $1.00 pollution tax on the producer. Supply shifts leftward.
A) This tax will be shifted entirely to the consumer.
B) This tax will be borne entirely by the producer.
C) The amount of the tax shifted to the consumer depends on the consumer's reaction.
D) The tax will be divided into equal amounts between consumer and producer.

Question

-Refer to above figure in which negative externality existed. The government imposes a $1.00 pollution tax on the producer. Supply shifts leftward.
A) This tax will be shifted entirely to the consumer. 
B) This tax will be borne entirely by the producer. 
C) The amount of the tax shifted to the consumer depends on the consumer's reaction. 
D) The tax will be divided into equal amounts between consumer and producer.

Quizplus · Accepted Answer

The amount of the tax shifted to the consumer depends on the elasticity of demand and supply. If demand is inelastic, consumers will bear a larger portion of the tax. If supply is inelastic, producers will bear more of the tax. The division of the tax burden between consumers and producers is not fixed and depends on their respective elasticities.

-Refer to Above Figure in Which Negative Externality Existed