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Use of excise taxes on goods that have inelastic demand

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Government imposes excise taxes on goods that have inelastic demand, such a cigarettes, more often than in other cases. Why? Explain using the elasticity concept.

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Solution Summary

How elasticity of demand affect tax incidence.

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Tax incidence describes how the burden of a tax is distributed between buyers and sellers. It depends strongly on the elasticity of the demand curve, which measures how changes in price affect demand. Thus the portion of the tax pre­sumed to be paid by the buyer or the seller varies depending on the responsiveness of the demand for and the supply of the product as the price changes. In a chart, this is reflected in the steepness of the demand and supply curves.If the demand curve slopes downward and the supply curve slopes upward, sellers cannot raise the price by the full amount of the tax. Sellers and consumers share the burden of ...

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