Tax Incidence on Inelastic Demand for Indirect Taxes

Steps:

• Identify the tax as indirect (e.g., excise on goods, passed from producers to consumers).
• Note the good is a necessity, implying price inelastic demand (quantity demanded changes little with price).
• Recall tax incidence: Burden falls more on the inelastic side; inelastic demand means consumers bear most via higher prices.
• Conclude large pass-through indicates indirect tax on inelastic demand.

Why D is correct:

• Indirect taxes on necessities have inelastic price elasticity of demand, so consumers absorb most burden per incidence theorem (burden on buyers = supply elasticity / (supply + demand elasticities)).

Why the others are wrong:

• A: Direct taxes (e.g., income) aren't passed on via prices; elasticity irrelevant.
• B: Direct taxes don't involve price pass-through, regardless of inelasticity.
• C: Elastic demand for indirect tax would mean consumers reduce quantity, shifting burden to producers.

Final answer: D