Suppose a tax is imposed in each of the four markets shown in the graphs. In which market will consumers bear the largest share of the tax burden?

• A. The market where both demand and supply are perfectly elastic.
• B. The market where both demand and supply are perfectly inelastic.
• C. The market where demand is relatively elastic and supply is relatively inelastic.
• D. The market where demand is relatively inelastic and supply is relatively elastic.

Answer: (D)

Verified step by step guidance

1. Recall that the tax burden (or tax incidence) depends on the relative elasticities of demand and supply. Elasticity measures how much quantity demanded or supplied responds to price changes.
2. Understand that when demand is more inelastic than supply, consumers bear a larger share of the tax burden because they are less sensitive to price changes and will not reduce quantity demanded much.
3. Conversely, when supply is more inelastic than demand, producers bear a larger share of the tax burden because they cannot easily reduce quantity supplied.
4. Analyze the extreme cases: if both demand and supply are perfectly elastic, neither side bears much burden because quantity adjusts infinitely; if both are perfectly inelastic, the burden is shared equally since quantity does not change.
5. Therefore, identify the market where demand is relatively inelastic and supply is relatively elastic, as this condition leads to consumers bearing the largest share of the tax burden.