Sunday, September 18, 2011

Tax and Elasticity


In determining who shares the burden of taxation, we have to take into account elasticity.  If the demand curve is elastic, the producer will share more of the tax burden; a perfectly elastic demand curve will require the producer to take 100% of the burden.  If the demand curve is inelastic, the consumers will share more of the tax burden; a perfectly inelastic demand curve will result in the consumer taking100% of the tax burden.  The same is also true for the supply curves.