Multiple Choice
In a supply and demand diagram, the vertical distance between points A and B represents a tax in the market. What does this vertical distance specifically measure?
95
views
6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
Multiple Choice
Which of the following statements is true about taxes and their incidence in a market?
A
Sellers can always pass the full amount of a tax onto buyers regardless of market conditions.
B
The economic burden of a tax is always borne entirely by consumers.
C
The economic burden of a tax is shared between buyers and sellers, depending on the relative elasticities of supply and demand.
D
Taxes do not affect the equilibrium quantity traded in a market.
Verified step by step guidance1
Understand the concept of tax incidence, which refers to how the burden of a tax is divided between buyers and sellers in a market.
Recall that the division of the tax burden depends on the relative price elasticities of supply and demand. Elasticity measures how much quantity supplied or demanded responds to price changes.
Recognize that if demand is more inelastic than supply, consumers bear a larger share of the tax burden, and if supply is more inelastic than demand, producers bear more of the tax burden.
Note that sellers cannot always pass the full amount of a tax onto buyers because the ability to do so depends on these elasticities; the tax burden is shared rather than fully shifted.
Remember that taxes generally reduce the equilibrium quantity traded in the market because they increase the price buyers pay and decrease the price sellers receive, creating a wedge between supply and demand.
Related Videos
Related Practice
