Suppose the market for grass seed is expressed as Demand: QD = 100 – 2

Suppose the market for grass seed is expressed as Demand: QD = 100 – 2p Supply: QS = 3p Price elasticity of supply is constant at 1. If the supply curve is changed to Q = 8p, price elasticity of supply is still constant at 1. Yet, with the new supply curve, consumers pay a larger share of a specific tax. Why?

What will be an ideal response?

ANSWER

Even though the elasticity of supply has not changed, the new supply curve intersects the old demand curve at a lower price where demand is relatively less elastic than at the higher price. Since the incidence of a specific tax on consumers is n/(n – e), where n is the price elasticity of supply and e is the price elasticity of demand, therefore when e increases (less elastic demand), the consumers’ tax incidence is higher.