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What is the relationship between the price elasticity of supply and the incidence of a tax? What about the price elasticity of demand and the impact of a consumption tax? Economists use the term tax incidence to indicate how the burden of a tax is actually shared between buyers and sellers. When a tax is imposed, the government can make either the buyer or the seller legally responsible for payment of the tax. The legal assignment is called the statutory incidence of the tax. However, the person who writes the check to the government – the person statutorily responsible for the tax – is not always the one who bears the burden. The incidence of a tax depends on the responsiveness of buyers and sellers to a change in price. The burden of a tax – it’s incidence – tends to fall more heavily on whichever side of the market has the least attractive options elsewhere; and is therefore less sensitive to price changes. The steepness of the supply and demand curves reflects the degree of responsiveness to a price change. Relatively inelastic demand or supply curves are steeper (more vertical), indicating that they are less responsive to a change in price. Relatively elastic demand or supply curves are flatter (more horizontal), indicating a higher degree of responsiveness to a change in price. Remember that, though closely related, slope and elasticity are different. Excise taxes are placed in good with a very inelastic demand, so the price increases caused by the tax will not affect demand for the good.
Create a two to three page essay that describes how a governmental agency would use the concept of elasticity to determine what products to tax and how to determine the likely effects upon consumers and producers. Provide examples and support all arguments.
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