APFIVE Tax Incidence With Elastic Demand
What effect does an excise tax imposed on sellers have on the cigarette market assuming cigarettes are an elastic good?
A
After-tax equilibrium price paid by buyers rises exactly by tax amount as incidence of tax is evenly distributed regardless of elasticity.
B
The after-tax-equilibrium-price paid by buyers rises less than tax amount as sellers cannot pass full incidence onto buyers due to elasticity.
C
Tax imposition has no significant effects since burden equally shared between buyers and sellers regardless of product elasticity.
D
Sellers absorb the entire cost, so after-tax equilibrium price for buyers remains unchanged while quantity sold stays the same.
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