Effect of Tax Depending on Elasticity

A tax shifts the supply curve to the left. However, the impact of a tax depends on the elasticity of demand. If demand is inelastic, a higher tax will cause only a small fall in demand. Most of the tax will be passed onto consumers. When demand is inelastic, governments will see a signficant increase in their tax revenue.

Diagram of Tax on inelastic demand


If demand is elastic, demand will fall more. The tax will be more effective in reducing demand, but less effective in raising revenue for the government

Effect of Tax on Elastic Demand


Price elasticity of demand

Video of Elasticity

(sorry diagrams are not so visible)

Share on FacebookTweet about this on TwitterShare on Google+

4 thoughts on “Effect of Tax Depending on Elasticity

  1. Is elasticity of supply have any role to play in this? Like, say, elastic supply will result in larger reduction in quantity and bigger Deadweight loss?

  2. The best thing to do is draw a diagram. Then change the elasticity of supply.

    When I drew a diagram and made the supply curve more inelastic, the price increase was lower for same amount of tax rise.

Comments are closed.