The price elasticities of supply and demand affect
A)both the size of the deadweight loss from a tax and the tax incidence.
B)the size of the deadweight loss from a tax but not the tax incidence.
C)the tax incidence but not the size of the deadweight loss from a tax.
D)neither the size of the deadweight loss from a tax nor the tax incidence.

Question

Quizplus · Accepted Answer

The price elasticities of supply and demand affect both the size of the deadweight loss from a tax and the tax incidence. If the supply and demand are elastic, the burden of the tax will be shared between producers and consumers, resulting in a smaller deadweight loss. If the supply and demand are inelastic, the burden of the tax falls mostly on one side, resulting in a larger deadweight loss. The tax incidence also depends on the relative elasticities of supply and demand. If demand is more elastic than supply, consumers bear a smaller proportion of the tax, and vice versa.

The Price Elasticities of Supply and Demand Affect