Compared to producers, consumers will lose the lesser amount of surplus from a tax if

Question

BlackTom AI · Accepted Answer

Tax incidence depends on the relative elasticities of demand and supply: the side that is less responsive (more inelastic) to price changes bears more of the tax burden.

Relevant concepts:
- Consumer surplus and producer surplus measure net benefits to buyers and sellers.
- Tax incidence: how the tax burden is split depends on price elasticities.
- Formula: buyer’s share of the tax ≈ Es / (Es + |Ed|), where Es is supply elasticity and |Ed| is the absolute value of demand elasticity.

Step-by-step reasoning:
1. If demand is more elastic than supply, consumers respond strongly to price changes (large |Ed|), while producers respond less (small Es).
2. Plug into the incidence formula: buyer’s share = Es / (Es + |Ed|). With Es small and |Ed| large, Es/(Es+|Ed|) is small.
3. A small buyer share means consumers pay only a small portion of the tax; producers therefore pay the larger portion.
4. Numerical example: let Es = 1 and |Ed| = 3. Buyer’s share = 1/(1+3) = 1/4 (25%); sellers pay 75%. Consumers therefore lose less surplus than producers.

Why the correct answer is correct:
- When demand is more elastic than supply, buyers avoid the tax by reducing quantity a lot, forcing sellers to absorb more of the tax (larger producer surplus loss). Thus consumers lose the lesser amount of surplus.

Why the other choices are incorrect:
- a. If supply and demand are equally elastic, the tax burden is split roughly equally, so consumers would not lose the lesser amount.
- b. If supply is perfectly elastic (horizontal), sellers won’t accept any lower net price; the tax is passed fully to consumers, so consumers lose the entire burden (not lesser).
- c. If demand is perfectly inelastic, consumers absorb the entire tax burden (they lose the most), so this is the opposite of the condition asked.

Conclusion: Consumers will lose the lesser amount of surplus from a tax if demand is more elastic than supply — answer d.

Compared to producers, consumers will lose the lesser amount of surplus from a tax ifSingle choice

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