Figure 5 Elasticity of Supply and Tax Incidence

(a) Elastic Supply Curve

(a) Elastic Supply Curve

(b) Inelastic Supply Curve

Price tax revenue from buyers

Quantity tax revenue from buyers

tax revenue from sellers

In Figure 6. we illustrate the result for differences in the elasticity of demand. In panel (b) demand is relatively more inelastic, and we see tluu the size ol the deadweight loss (and the decrease in equilibrium output) is smaller when demand is more inelastic. We can also see that the actual incidence of the tax imposed on suppliers falls more heavily on buvers when demand is more inelastic.

Figure 6: Elasticity of Demand and Tax Incidence

(a) Elastic Demand Curve


tax revenue rrom ; vers tax revenue rrom ; vers

tax revenue from sellers1

tax revenue from sellers1

(b) Inelastic Demand Curve


(b) Inelastic Demand Curve

tax revenue Í

om buver.s

\ sIlv



: : D

tax revenue from sellers; ;


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