CA Foundation · Business Economics · Public Finance
A government taxes a good whose demand is perfectly inelastic and supply is upward sloping. Which statement is correct regarding the incidence of an excise tax on sellers?
Consumers bear the entire burden. When demand is perfectly inelastic, buyers purchase the same quantity whatever the price, so sellers raise the price by the full amount of the tax. The tax is shifted forward completely, even though quantity traded stays unchanged.
- AProducers bear the entire burden of the tax
- BBurden is shared equally between producers and consumers
- CConsumers bear the entire burden of the taxCorrect
- DNeither group bears the burden, since quantity does not change
Explanation
With perfectly inelastic demand, consumers do not reduce quantity when price rises, so sellers can raise the price by the full tax amount. The whole tax is passed forward to consumers. Option D is wrong because the burden is still borne, by consumers, even though quantity is unchanged.
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