Incidence of tax and elasticity
The extent to which the producer is able to pass on the tax by raising the price depends on the price elasticity of demand and supply for the product.
The following conclusions can be drawn:
Inelastic demand and Inelastic supply= More government revenue
Tax revenue for the government will be greater, the less elastic are demand and supply
(cases (1) and (3)).
Inelastic demand and Elastic supply = Larger consumer share of the tax
The consumers’ share of the tax will be larger, the less elastic is demand and the more elastic is supply
(cases (1) and (4)).
Elastic demand and Inelastic supply = Larger producer share of the tax
The producers’ share will be larger, the more elastic is demand and the less elastic is supply
(cases (2) and (3))