Consider the following statements about impact of tax :
- A tax is shifted forward to consumers if the demand is inelastic relative to supply.
- A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
Which of the statements given above is/are correct?
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CDS-1 – 2018
Statement 2: If supply is relatively more inelastic than demand, producers are less able to reduce the quantity supplied in response to a lower price received after tax. When a tax is imposed, producers bear a larger portion of the tax burden because they cannot easily adjust output. The price received by producers falls significantly. Thus, the tax is shifted backward to producers. This statement is correct.
Both statements accurately describe how the relative elasticity of demand and supply determines the incidence (burden) of a tax.