Tax Incidence Depends on Relative Elasticities

Steps:

• Taxes shift supply curve up by tax amount; new equilibrium price rises by portion of tax.
• Incidence on consumers is larger when demand curve is steeper (less elastic) relative to supply.
• If demand elasticity < supply elasticity, price increase ≈ tax amount, so consumers pay most.
• Elasticity comparison determines burden split.

Why A is correct:

• Tax incidence theorem: Burden falls more on side with lower price elasticity; if |Ed| < |Es|, consumers absorb most via higher prices.

Why the others are wrong:

• B: Unitary demand elasticity (|Ed| = 1) implies equal burden sharing, not mainly on consumers.
• C: Inelastic supply (|Es| < 1) and elastic demand (|Ed| > 1) mean producers bear most burden.
• D: Identical to C, so same error—reverses elasticities, shifting burden to producers.

Final answer: A