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Chapter 5: Q. 20 (page 130)

Under which circumstances does the tax burden fall entirely on consumers?

Short Answer

Expert verified

When demand is more inelastic than supply

Step by step solution

01

Step 1. Definition

Tax coverage means the final tax burden or the final tax coverage. Tax coverage may be on consumers or producers. The share of the tax burden is determined by the elasticity of demand and supply of the product.

02

Step 2. Explanation

When the demand is highly inelastic to price changes, the burden of taxes would fall mostly on the consumers. This is because the producers would increase their prices and decrease in quantity demanded as result would be less proportionate.

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