# Effect of tax – depending on elasticity

Placing a tax on a good, shifts the supply curve to the left. It leads to a fall in demand and higher price.

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 significant increase in their tax revenue.

Diagram of tax on inelastic demand

#### Consumer burden of tax rise

• The consumer burden of a tax rise, measure the extra amount consumers actually pay.
• In the above example, the specific tax is \$6.
• The price rises from \$10 to \$14 so the consumer burden is \$4 (x) 80. Total consumer burden is \$320

#### Producer burden of tax rise

• The producer burden is the decline in revenue from the tax
• In the above example, producers used to receive \$10, but now after the tax is paid, they are left with \$8 per uni
• The total producer burden is \$2 (x) 80) = \$160

Tax revenue for government

The total tax revenue for the government is \$6 x 80 = \$480

Effect of Tax on Elastic Demand

If demand is elastic, then an increase in price will lead to a bigger percentage fall in demand.

• In this case, the producer burden is greater than the consumer burden
• The tax will be more effective in reducing demand, but less effective in raising revenue for the government
• The total tax revenue for the government is \$6 x 50 = \$300

#### Comparison of inelastic and elastic demand

Related

Video of Elasticity

### 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?