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A specific tax is a fixed amount charged on each unit of a good or service sold. For instance, a specific tax of $1 means that for every unit sold, an extra $1 is collected by the government.
This kind of tax is different from ad valorem taxes, which are based on the value of the item. Instead, specific taxes remain constant regardless of price changes.
When a $1 specific tax is applied in a market, it directly affects the cost structure from the supplier's perspective. This often results in suppliers needing to adjust their prices. In a scenario with perfectly elastic supply, any tax directly shifts the supply curve upward by the tax amount, here $1.
As suppliers aim to maintain their profitability, they'll ensure they receive the same amount they did before the tax. This leads to the price being increased directly by the tax amount to pass the burden onto consumers.

The equilibrium price is where the quantity of goods supplied equals the quantity demanded. This is a central concept in economics that ensures market stability.
With perfectly elastic supply, this equilibrium concept becomes particularly clear. For example, when a specific tax is introduced, supply is represented by a horizontal line. Suppliers will only sell at this precise price, and any deviation is not accepted.
If a specific tax is added, the equilibrium price increases by exactly the tax amount. So, with a $1 tax, the new equilibrium price for consumers rises by $1, settling at a new higher price point immediately.
Thus, in response to perfectly elastic supply, the tax does not alter the equilibrium quantity supplied at the new higher price but can affect the demand due to the increased price.

Tax incidence refers to who bears the actual economic burden of the tax. In cases of perfectly elastic supply, like the one discussed, the burden falls entirely on the consumers.
Why does this happen? Because the supply is perfectly elastic, producers can and will pass the entire tax onto consumers without altering the quantity they supply. The added tax results in a rise in price directly matched by the tax amount.

• Consumers face the entire $1 increase in price resulting from the tax.
• Producers maintain their revenue and are indifferent to the tax.
• This is because the perfectly elastic supply means the price is the determining factor for supply, not quantity.

Given this setup, it's clear that any specific tax in a market with perfectly elastic supply solely impacts consumer expenditure, emphasizing how market conditions can significantly influence tax incidence.