Consider two markets that are similar in almost every way. Demand in one market is quite elastic though white demand in the other is quite inelastic. They have the same supply and the same equilibrium price and quantity. Suppose that the same size tax is placed on each market. Sort the effects of the tax based on their relative size in the different markets. If they are of equal size, leave the item unpiaced. P is the price the seller receives after the tax, Pbuyer is the price the buyer pays after the tax, and Q•x is the quantity produced after the tax.

1. Smaller When Demand is Elastic

2. Smaller When Demand is Inelastic

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The incidence of tax depends on the elasticty of demand or supply Th... View the full answer