Consider a market in which the law of demand hold, but supply is perfectly inelastic. The government levies a tax on consumers of t per unit consumed. In this case Group of answer choicesConsumer and suppliers share the incidence of the tax; the DWL is increasing in the price elasticity of demand.Consumer and supplier share the incidence of the tax; there is no DWL.Suppliers pay for part of the tax; the DWL is increasing in the price elasticity of demand.Suppliers pay for all of the tax; the DWL is zero.None of the above.
Question
Consider a market in which the law of demand hold, but supply is perfectly inelastic. The government levies a tax on consumers of t per unit consumed. In this case Group of answer choicesConsumer and suppliers share the incidence of the tax; the DWL is increasing in the price elasticity of demand.Consumer and supplier share the incidence of the tax; there is no DWL.Suppliers pay for part of the tax; the DWL is increasing in the price elasticity of demand.Suppliers pay for all of the tax; the DWL is zero.None of the above.
Solution
In a market where the law of demand holds and supply is perfectly inelastic, the burden of a tax levied on consumers will be completely borne by the consumers themselves. This is because suppliers, having a perfectly inelastic supply, cannot change their quantity supplied in response to the tax, and therefore cannot pass any part of the tax onto consumers in the form of higher prices.
The deadweight loss (DWL) in this case would be increasing in the price elasticity of demand. The more elastic the demand, the more consumers will reduce their quantity demanded in response to the tax-induced increase in price, leading to a larger DWL.
So, the correct answer would be: "Consumer and suppliers share the incidence of the tax; the DWL is increasing in the price elasticity of demand."
Similar Questions
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