The price elasticity of demand is 0.2, and the price elasticity of supply is 1.2. What happens if a $1 per unit tax is placed on sellers of this good?
A) The sellers' tax incidence is $1.
B) Sellers will have a larger tax incidence than buyers.
C) Sellers will have a smaller tax incidence than buyers.
D) The buyers' tax incidence is greater than $1.

Question

Quizplus · Accepted Answer

Given the price elasticities, the burden of the tax falls more on the side of the market that is less elastic. Since demand is less elastic (0.2) than supply (1.2), buyers will bear a larger portion of the tax burden than sellers.

The Price Elasticity of Demand Is 0