Multiple Choice
In the presence of a tax on suppliers, which of the following best describes the effect on the market equilibrium?
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6. Introduction to Taxes and Subsidies
Introducing Taxes and Tax Incidence
Multiple Choice
Which of the following statements about the economics of taxes is correct?
A
Taxes always lead to an increase in market equilibrium quantity.
B
The economic burden of a tax always falls entirely on the party that is legally responsible for paying the tax.
C
A tax imposed on sellers will not affect buyers in any way.
D
The incidence of a tax depends on the relative elasticities of supply and demand.
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 legal responsibility to pay a tax (statutory incidence) does not necessarily determine who actually bears the economic burden (economic incidence) of the tax.
Recognize that the effect of a tax on market equilibrium quantity depends on how supply and demand respond to price changes, i.e., their elasticities.
Analyze how the relative price elasticities of supply and demand influence the distribution of the tax burden: the side of the market that is less elastic (less responsive to price changes) bears a greater share of the tax burden.
Conclude that the correct statement is that the incidence of a tax depends on the relative elasticities of supply and demand, rather than the other options which are incorrect or incomplete.
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