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VAT Theories - Elastic or Inelastic Demand

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The tax burden falls mainly on consumers when demand is relatively elastic and it falls mainly on producers when demand is inelastic. True or false? Explain and give examples.

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Solution Summary

React to the issue of tax burdens.

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This is false. When the demand is elastic, sellers pay the lion share of the taxes and when it is inelastic, this time the tax burden falls mainly on consumers. The portion of the tax presumed to be paid by the buyer or the seller depends on the responsiveness of the demand for and the supply of the product or input as the price changes.

Let's examine two extreme situations to explain this. Assume that demand is perfectly elastic in a ...

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