Question

    Which of the following statements accurately describes

    the concept of Tax Incidence when the supply curve for the taxed good is perfectly elastic (ES=∞)?
    A The economic burden of the tax will fall entirely on the producers. Correct Answer Incorrect Answer
    B The economic burden will be shared equally between consumers and producers. Correct Answer Incorrect Answer
    C The economic burden of the tax will fall entirely on the consumers. Correct Answer Incorrect Answer
    D The tax will be borne by the factor of production that has a relatively low price elasticity. Correct Answer Incorrect Answer

    Solution

    Solution: The general rule for tax incidence is: The party with the relatively more inelastic (less responsive) curve bears the greater share of the tax burden. · If the Supply Curve is Perfectly Elastic (ES=∞), it means suppliers are highly sensitive to price changes and will supply zero quantity unless they receive the initial pre-tax price. · In this extreme case, producers can shift the entire burden of the tax forward to consumers. The price paid by consumers will increase by the full amount of the tax, meaning the consumers bear 100% of the economic burden.

    Practice Next
    More Research Questions
    ask-question