Tax Incidence and Elasticity of Demand

Steps:

• Tax on a good raises price for consumers and lowers net price for producers; incidence depends on relative elasticities.
• Burden falls more on the less elastic side: inelastic demand means consumers pay more, elastic demand means producers pay more.
• To shift most burden to producers, demand must be highly elastic so quantity demanded drops sharply with price rise.
• High elasticity forces producers to absorb tax via lower net receipts to maintain sales.

Why A is correct:

• High price elasticity means consumers reduce quantity significantly when price rises, so producers bear most tax to avoid lost sales (per tax incidence theorem).

Why the others are wrong:

• B: Low elasticity means consumers bear more tax as they continue buying despite price increase.
• C: Totally inelastic demand places entire tax burden on consumers, who buy the same amount regardless of price.
• D: Unitary elasticity splits tax burden equally between consumers and producers.

Final answer: A