Refer to Figure 6-13. How is the burden of the tax shared between buyers and sellers? Buyers bear:

• A. none of the tax burden if supply is perfectly elastic
• B. the entire tax burden regardless of elasticities
• C. a larger share of the tax burden if demand is more inelastic than supply
• D. a smaller share of the tax burden if demand is more inelastic than supply

Answer: (C)

Verified step by step guidance

1. Understand the concept of tax incidence, which refers to how the burden of a tax is divided between buyers and sellers depending on the price elasticities of demand and supply.
2. Recall that the more inelastic side of the market (either demand or supply) bears a larger share of the tax burden because they are less responsive to price changes and cannot easily avoid the tax.
3. Analyze the case when supply is perfectly elastic: sellers can supply any quantity at a fixed price, so they cannot bear any tax burden; thus, buyers bear the entire tax burden.
4. Consider the scenario where demand is more inelastic than supply: since buyers are less sensitive to price changes, they will bear a larger share of the tax burden compared to sellers.
5. Summarize that the tax burden distribution depends on relative elasticities: the side (buyers or sellers) with the more inelastic curve bears a larger portion of the tax.