Which of the following statements is false? (A) Consumers with an elastic demand

Question

Which of the following statements is false?

(A) Consumers with an elastic demand for a service will not bear the burden of a tax if the suppliers of a good have an inelastic supply

(B) Suppliers with an inelastic supply for a service will not bear the burden of a tax if the consumers of a good have an elastic demand

(C) Suppliers with an inelastic demand for a service will bear the budern of a tax if the consumers of a good have a perfectly elastic demand

(D) Consumers with an inelastic demand for as ervice will share the burden of a tax if the suppliers of a good have an inelastic supply

Explanation / Answer

Tax is the financial charge that the government levies on the taxpayers to finance various public expenditures. It is one major source of income to the government. A tax drives a wedge between the market price and the price sellers receive and creates a deadweight loss to the society.The difference between pretax equilibrium price and the price sellers receive or the price consumer pays is called the burden of a tax to producers and consumers respectively. The deadweight loss is called the excess burden of tax. A tax is efficient if it raises enough revenue to outweigh the excess burden it imposes on the society.

The price elasticity of demand measures the percentage change in demand due to percentage change in price.If the percentage change in demand is greater than change in price, the good or service has elastic demand. If the percentage change in demand is less than change in price, the good or service has inelastic demand. The price elasticity of supply measures the percentage change in supply due to percentage change in price. If the percentage change in supply is greater than change in price, the good or service has elastic supply. If the percentage change in supply is less than change in price, the good or service has inelastic supply.

Tax decreases the amount transacted below the equilibrium quantity at pre tax equilibrium. For inestic demand the same proportionate decrease in quantity increases the price more than elastic demand. Therefore, the burden of tax falls more to the consumer with inelastic demand than the consumer with elastic demand. This is also true for suppliers.

Hence, suppliers with inelastic supply bears the burden of tax, than consumer with elastic demand. Similarly, the consumer with inelastic demand bears the burden of tax, than the producers' with elastic supplly. In case of perfectly elastic demand, the whone burden is bourne by the producers. In case of equal elaticities of demand and supply, both share the burden of tax.

Hence, the correct option is:

(B) Suppliers with an inelastic supply for a service will not bear the burden of a tax if the consumers of a good have an elastic demand

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