If demand is highly elastic, which group tends to bear a greater share of a tax burden?

If demand is highly elastic, which group tends to bear a greater share of a tax burden?

• A. Buyers
• B. Producers
• C. The government
• D. Both equally

Answer: (B)

Tax incidence depends on who is less responsive to price changes. When demand is highly elastic, buyers react strongly to price increases and reduce the quantity they buy a lot. With a tax, this makes it costly for sellers to push the price up by the full tax amount, because doing so would sharply cut their sales. To avoid losing many customers, producers end up absorbing a larger share of the tax themselves by accepting a lower effective price received. In other words, the burden shifts toward the side that is less flexible—here, the producers. If demand were inelastic, buyers would continue to buy close to the same amount, and they would bear more of the tax instead.

Tax incidence depends on who is less responsive to price changes. When demand is highly elastic, buyers react strongly to price increases and reduce the quantity they buy a lot. With a tax, this makes it costly for sellers to push the price up by the full tax amount, because doing so would sharply cut their sales. To avoid losing many customers, producers end up absorbing a larger share of the tax themselves by accepting a lower effective price received. In other words, the burden shifts toward the side that is less flexible—here, the producers. If demand were inelastic, buyers would continue to buy close to the same amount, and they would bear more of the tax instead.