True or false: the effect of the tax on the quantity sold would have been the same as if the tax had been levied on producers.

Question

Fernanda Nicholson

Business

7 September, 02:57

True or false: the effect of the tax on the quantity sold would have been the same as if the tax had been levied on producers.

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Answers (2)

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Brennen Solis · Answer 1

False.

If the tax is on producers (the people making the product) they may choose to make less of the product, not make it at all, or raise the price. If the tax is on consumers (the people buying the product) then the producer doesn't have to pay anything extra.

Ellis Ryan · Answer 2

False

Explanation:

What determines the tax incidence, i. e. who bears the burden of a tax between the consumer or a producer, when the tax is levied on producers is elasticity of demand.

Elasticity of demand is the degree of responsiveness of percentage change quantity demanded to a percentage change in price. Elasticity of demand can be elastic, perfectly elastic, inelastic, perfectly inelastic or unitary.

Elasticity of demand is elastic if the consumer can change the quantity of a good he buys more than the change in price. Therefore, producer will bear more tax than the consumer in this case if does not want to lose his market share. This is because consumer can reduce the quantity of the good demanded at a higher.

Elasticity of demand is perfectly elastic if the consumer can demand zero quantity of a good when there is a change in price. Therefore, producer will bear the total tax in this case if does not want to lose his market share. This is because consumer can decide not to buy the good again.

Elasticity of demand is inelastic if the consumer can change the quantity of a good he buys less than the change in price. Therefore, consumer will bear more tax than the producer in this case. This is because consumer will still buy certain quantity of the good at a higher that will not reduce the producer revenue much.

Elasticity of demand is perfectly inelastic if the consumer will buy unlimited quantity of a good no matter the level of the price. Therefore, consumer will bear the total tax in this case and the quantity of the sold will not be affected.

Elasticity of demand is unitary if the consumer can change the quantity of a good he buys at the same level of the change in price. Therefore, both the producer and the consumer will bear the tax burden equally.

Therefore, it is only under perfectly inelastic elasticity of demand that the effect of the tax on the quantity sold would have been the same as if the tax had been levied on producers. Not in all cases.

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