Which statement is true?Group of answer choicesThe economic incidence of taxation falls more heavily on the more inelastic side of the market.In general the burden of the tax falls on the more elastic side of the marketIn general the burden of the tax falls on the side of the market who is legally responsible for paying the tax.The economic incidence of taxation falls fully on the sellers if supply is perfectly elastic and/or if demand is perfectly inelastic.None of the statements are true.
Question
Which statement is true?Group of answer choicesThe economic incidence of taxation falls more heavily on the more inelastic side of the market.In general the burden of the tax falls on the more elastic side of the marketIn general the burden of the tax falls on the side of the market who is legally responsible for paying the tax.The economic incidence of taxation falls fully on the sellers if supply is perfectly elastic and/or if demand is perfectly inelastic.None of the statements are true.
Solution
The statement that is true is: "The economic incidence of taxation falls more heavily on the more inelastic side of the market."
Here's why:
The economic incidence of a tax refers to who actually bears the burden of the tax. This is not necessarily the same as who is legally obliged to pay the tax.
In the context of supply and demand, elasticity refers to how much the quantity demanded or supplied changes in response to a change in price. If demand is inelastic, it means that consumers will continue to buy roughly the same amount of a good even if the price increases. If supply is inelastic, it means that producers will continue to supply roughly the same amount of a good even if the price decreases.
So, if a tax is imposed on a good, the side of the market that is more inelastic will bear a greater burden of the tax. This is because they are less able to change their behavior in response to the tax. For example, if demand is inelastic, consumers will continue to buy the good even though the price has increased due to the tax. Therefore, they will bear a greater burden of the tax. Conversely, if supply is inelastic, producers will continue to supply the good even though they are receiving less money for it due to the tax. Therefore, they will bear a greater burden of the tax.
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