ACCA Applied Knowledge · Business and Technology · Microeconomic factors

The government imposes a per-unit tax on the sellers of a good. Demand for the good is highly price inelastic and supply is relatively elastic. Which statement is most accurate about who bears the burden of the tax?

Buyers bear most of the burden. Tax incidence depends on relative elasticities rather than who legally pays. When demand is inelastic, consumers keep buying despite higher prices, so sellers can pass most of the tax on, while elastic supply means sellers would cut output if they absorbed it.

1. ASellers bear most of the burden because they pay the tax to the government
2. BBuyers bear most of the burden because they have little ability to reduce purchases when the price risesCorrect
3. CThe burden is always shared equally between buyers and sellers
4. DNeither party bears the burden because the tax is paid to the government