CIMA BA1 · Chapter 5 · Question 8 of 10
A specific indirect tax is imposed on a product for which demand is highly price inelastic and supply is relatively price elastic. Which of the following statements is correct?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Most of the burden of the tax will fall on consumers
Explanation
The incidence of a tax falls more heavily on the side of the market that is less responsive to price. With inelastic demand, consumers continue to buy at higher prices, so producers can pass most of the tax on. Quantity traded falls only slightly.
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