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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

A per-unit tax is levied on sellers of a good. The tax burden falls mostly on consumers when:

Consumers bear most of a per-unit tax when demand is inelastic relative to supply. Buyers then cannot cut purchases much, so sellers pass the tax on through a higher price. The party with the less elastic response carries the larger share of the burden.

  1. ADemand is relatively price inelastic and supply is relatively elasticCorrect
  2. BDemand is relatively price elastic and supply is relatively inelastic
  3. CBoth demand and supply are perfectly elastic
  4. DSupply is perfectly inelastic
  5. The tax is collected from buyers instead of sellers

Explanation

The side of the market that is less responsive to price bears more of the tax. If demand is inelastic, consumers cannot cut purchases much, so sellers pass most of the tax on in a higher price. Legal incidence does not determine economic incidence.

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