Which of the following statements concerning taxation is accurate?

• A. A tax always reduces both consumer and producer surplus by the same amount.
• B. The incidence of a tax depends on the relative elasticities of supply and demand.
• C. If demand is perfectly elastic, consumers bear the entire burden of the tax.
• D. The economic burden of a tax falls entirely on the party that is legally required to pay the tax.

Answer: (B)

Verified step by step guidance

1. Understand the concept of tax incidence, which refers to how the burden of a tax is divided between consumers and producers, regardless of who is legally responsible for paying the tax.
2. Recall that the incidence of a tax depends on the relative price elasticities of supply and demand. Specifically, the side of the market (consumers or producers) that is less elastic (less responsive to price changes) will bear a greater share of the tax burden.
3. Analyze the statement about a tax always reducing both consumer and producer surplus by the same amount. Recognize that the loss in surplus is generally shared unevenly and depends on elasticities, so this statement is inaccurate.
4. Consider the case when demand is perfectly elastic (horizontal demand curve). In this scenario, consumers are very sensitive to price changes, so producers bear the entire tax burden, making the statement that consumers bear the entire burden incorrect.
5. Evaluate the idea that the economic burden falls entirely on the party legally required to pay the tax. Understand that legal responsibility does not determine economic incidence; the actual burden depends on market elasticities, so this statement is also incorrect.