Question

suppose that we are in butter market and the government implements an excise tax on butter. the price elasticity of demand for butter equals 2 and the price elasticity of supply for butter equals 2. what is the portion of the tax that consumers will be burdened with? is this realistic given the market we are in?

Answer 1

Answer:

Portion of tax burden shared by buyers (consumers) & sellers will be equal, ie half half each.

Explanation:

When an indirect tax, whose burden & incidence are on different people, (like excise tax) is levied : Its burden is borne more by buyers if demand is relatively more inelastic (or less elastic), & more by sellers if supply is relatively less inelastic (or less elastic).

Given, price elasticity of demand & supply both = 2 respectively. So, excise tax burden is shared by both buyer & sellers equally, as both demand & supply are equally price elastic.