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Taxes and Inelastic Products
Web Activity:
http://www.economicsamerica.org/econedlink/newsline/internet/invention2.html
Given supply, the more inelastic the demand for the product, the larger the portion of the tax shifted forward to consumers.
Determine which products are elastic or inelastic.
Revenue-seeking legislatures place heavy excise taxes on liquor, cigarettes, automobile tires, and other products whose demand is inelastic. Given demand, the more inelastic the supply, the larger the portion of the tax borne by producers. Gold is an example of a product for which supply is inelastic and therefore for which the burden of an excise tax would fall mainly on producers. On the other hand, because the supply of baseballs is elastic, much of an excise tax on this product would get passed forward to consumers. Take a look at the products and their elasticity coefficients. Which of the following is likely to pass the cost of a tax to consumers? to producers? (Hint: Price elasticity of demand <1 = inelastic; price elasticity of demand >1 = elastic.)
Author: Carey WHITE - Email carey.montierth@nebo.edu