Indirect tax and elasticity (Consumer, Producer and Government Evaluation) Flashcards
(19 cards)
What happens when an indirect tax is applied in a market with price elastic demand (PED > 1)?
Consumers are very responsive to price changes, so producers absorb more of the tax burden to avoid losing sales.
In a price elastic market, how is the tax burden shared?
Producer burden is high, consumer burden is low — producers cannot pass on much of the tax through higher prices.
What happens to government revenue in a market with elastic demand?
Government revenue is relatively low because the fall in quantity demanded is significant, reducing total taxable sales.
What does a shallow (flat) demand curve indicate?
It shows price elastic demand, meaning small price increases cause large drops in quantity demanded.
What happens if PED = ∞ (perfectly elastic demand)?
All the tax burden falls on producers, as any price increase causes quantity demanded to fall to zero.
Why is government revenue lower when demand is elastic?
Because consumers buy significantly less when prices rise, so the tax base shrinks.
What happens when an indirect tax is applied in a market with price inelastic demand (PED < 1)?
Consumers are less responsive to price changes, so most of the tax burden falls on consumers.
In a price inelastic market, how is the tax burden shared?
Consumer burden is high, producer burden is low — producers can pass most of the tax onto consumers without a big drop in sales.
What happens to government revenue in a market with inelastic demand?
Government revenue is high, because quantity demanded does not fall much, even with higher prices.
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What does a steep demand curve indicate?
It shows price inelastic demand, meaning consumers still buy even when prices rise.
What happens if PED = 0 (perfectly inelastic)?
Consumers bear the entire tax burden — quantity demanded stays the same no matter the price increase.
Why is government revenue higher when demand is inelastic?
Because quantity sold barely changes, so the full tax applies to nearly the same number of units.
What happens when supply is price elastic (PES > 1)?
Producers can increase output easily, so most of the tax burden is passed to consumers.
In a price elastic supply market, who bears more of the tax burden?
Consumers bear more of the tax burden.
Producer burden is lower.
What does PES = ∞ (perfectly elastic supply) mean for tax burden?
Supply curve is horizontal — producers take no burden,
consumers pay the full tax through higher prices.
What happens when supply is price inelastic (PES < 1)?
Producers cannot easily increase output, so they absorb more of the tax burden.
In price inelastic supply, who bears more of the tax burden?
Producer burden is higher, consumer burden is lower.
What does PES = 0 (perfectly inelastic supply) mean for tax burden?
Supply curve is vertical, so producers take the full burden of the tax.
