8. Effect of a tax on buyers and sellers The following graph shows the daily mar
ID: 1117220 • Letter: 8
Question
8. Effect of a tax on buyers and sellers The following graph shows the daily market for jeans when a tax on sellers is set at $0 per pair. Suppose the government institutes a tax of $20.30 per pair, to be paid by the seller. (Hint: To see the impact of the tax, enter the value of the tax in the Tax on Sellers field and move the green line to the after-tax equilibrium by adjusting the value in the Quantity field. Then enter zero in the Tax on Sellers field. You should see a tax wedge between the price buyers pay and the price sellers receive.) Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly Graph Input Tool Market for Jeans 100 90 80 70 60 Quantity (Pairs of jeans) Demand Price (Dollars per pair) 10 Supply Price (Dollars per pair) 66.00 0.00 Supply Shifter 40 30 20 10 Demand Tax on Sellers (Dollars per pair) 0.00 0 10 20 30 40 50 60 70 80 90 100 QUANTITY (Pairs of jeans)Explanation / Answer
Answer: Inelastic or less-elastic
The burden of the tax falls more heavily on the factor that is inelastic. This is because in case of a sudden hike in tax rate the elastic factors can either move away from the market or hike their prices but the factor that is inelastic responds less to a price change(definition of elasticity), and hence has to bear more brunt of the tax.
Eg: A tax on land(which is an inelastic factor) the producer will bear the major brunt of the tax since she/he will not be able to sell off the land immediately. The demand and supply of land is inelastic. If the producer tries to pass on the majority of the tax on consumers(which are on the elastic side), the consumers might move away from this producer to another.
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