Details

Elasticity refers to responsiveness to price changes; a high-price elasticity of demand indicates that consumers consume much less after a price increase or much more after a price decrease. Price elasticity of supply works the opposite way with production by suppliers, such that highly elastic supply leads to sharply increased production after a price increase and a significant decrease in production when prices fall. It makes sense that the group (consumers or producers) that has a smaller, more inelastic curve bears the burden of the tax because they will not respond very much to the price change relative to their elastic counterpart. Snapshot 1 demonstrates how both producers and consumers share the burden of the tax when their elasticities are equal. Snapshot 2 illustrates a scenario where demand is more elastic than supply, so suppliers bear the more significant burden. Snapshot 3 shows how consumers bear the more significant tax burden when supply is more inelastic than demand.