In extreme cases the supply or demand curve can be either vertical (perfectly in
ID: 1198625 • Letter: I
Question
In extreme cases the supply or demand curve can be either vertical (perfectly inelastic) or horizontal (perfectly elastic). In such extreme situations the burden of a per unit excise tax falls entirely on one side of the market. Using a diagram in each case, explain why each of the following scenarios occurs. A horizontal demand curve results in the suppliers bearing the entire burden of an excise tax. A horizontal supply curve results in the consumers bearing the entire burden of an excise tax. A vertical demand curve results in the consumers bearing the entire burden of an excise tax. A vertical supply curve results in the suppliers bearing the entire burden of an excise tax. A vertical supply or demand curve results no deadweight loss when an excise tax is imposed.Explanation / Answer
B1.a. In this case if supplier charges a bit more from consumer, they will not buy anything as demand is perfectly elastic.
b. In this case if consumers refuse to bear full burden by price rise then, producers will stop producing as they are perfectly elastic.
c. Vertical demand curve means buyers are fully inelastic, they do not care at all about the price rise. Hence, producers will take advatnage of this and meet up the tax burden by charging higher price and ultimately, the consumers will pay the total.
d. Vertical supply curve refers suppliers to be perfectly inelastic, i.e they are unaffected by tax, hence, they will bear the sole burden as it doesn't seem to bother them.
e. Dead weight loss needs to be difference in initial and final output. Thus, as there is no difference in case of vertical demand/supply curve its value is equal to zero.