Inelastic tax burden. Microeconomics

Question

Which of the following statement is correct?

A) Demand is more price inelastic than supply and consumers bear a larger portion of the tax burden.

B) Demand is more price inelastic than supply and suppliers near a larger portion of the tax burden.

C) Supply is more price inelastic than demand and consumers bear a larger portion of the tax burden.

D) supply is more price inelastic than demand and suppliers bear a larger portion of the tax burden.

Thank you for your help.

Answer 1

The Share of the Tax burden borne by by consumers is - Elasticity of Supply/(Elasticity of Supply - Elasticity of demand. If both supply and demand are unit elastic The share borne by consumers is 1/(1-_-1) = 1/2. and the share born by producers is 1/2/ formula for producers is Share = -elasticity of demand / elasticity of supply minus elasticity of demand.. As demand becomes elastic (more negative of flatter) The share borne by producers approaches one as supply becomes more elastic the share borne by consumers approaches one.

Note in a competitive market with constant returns to scale the supply curve if perfectly elastic. in the short run the tax would be shared. however, firms will exit the industry we will move up the demand curve until the full burden is born by consumers