6. The economic incidence of a tax is larger on consumers: (i) The larger is the elasticity of demand relative to the elasticity of supply. (ii) The more salient is the tax. (iii) The less salient is the tax. (iv) The more inelastic is supply.
Question
- The economic incidence of a tax is larger on consumers: (i) The larger is the elasticity of demand relative to the elasticity of supply. (ii) The more salient is the tax. (iii) The less salient is the tax. (iv) The more inelastic is supply.
Solution
The economic incidence of a tax is larger on consumers:
(i) Incorrect. The economic incidence of a tax is larger on consumers when the elasticity of demand is smaller relative to the elasticity of supply. When demand is more inelastic compared to supply, consumers bear a larger burden of the tax.
(ii) Incorrect. The salience of a tax refers to how noticeable or prominent the tax is to consumers. The more salient a tax is, the more likely consumers are to change their behavior to avoid the tax, which can shift the burden away from them.
(iii) Correct. When a tax is less salient, consumers are less likely to change their behavior in response to the tax, leading to a larger economic incidence on consumers.
(iv) Correct. When supply is more inelastic, producers are less able to change the quantity supplied in response to the tax, leading to a larger economic incidence on consumers.
Similar Questions
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