Sellers of a good bear the larger share of the tax burden when a tax is placed on a product for which the

Question

Quizplus · Accepted Answer

When a tax is placed on a product, the price of the product increases. As a result, buyers reduce their demand for the product, which leads to a decrease in quantity demanded. So, the burden of a tax is shared by both buyers and sellers. But, the relative share of the tax burden depends on the price elasticity of demand and supply. If the demand is more elastic than the supply, the burden falls more on the sellers. On the other hand, if the supply is more elastic than the demand, the burden falls more on the buyers. Option (ii) mentions this point correctly. Options (i), (iii), and (iv) are incorrect because they provide incomplete or incorrect information about the tax incidence.

Sellers of a Good Bear the Larger Share of the Tax