Consider two markets that are similar in almost every way. Demand in one market

Question

Consider two markets that are similar in almost every way. Demand in one market is quite elastic though while demand in the other is quite inelastic. They have the same supply and the same and quantity. Suppose that the same size tax is placed on each market. Sort the effects of the tax based on their relative size in the different markets. If they are of equal size, leave the item unplaced. Pseller is the price the seller receives after the tax, Pbuyer is the price the buyer pays after the tax, and Qtaxis the quantity produced after the tax.

Explanation / Answer

The incidence of tax depends on the elasticty of demand or supply. The greater the elasticity(sensitivity) the lower is the incidence of tax and vice versa. The following table shows the effect of tax under each category:

Smaller when demand is elastic Smaller when demand is inelastic P buyer P seller Q tax Producer surplus Government revenue

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.