Who does bear the tax burden when the demand is perfectly: When the demand is perfectly elastic and the supply curve is of a normal shape, the tax burden falls entirely on the producers or suppliers.
In this scenario, consumers are extremely sensitive to changes in price, and any increase in the price of the good due to the imposition of a tax will result in a complete loss of consumer demand.
Perfectly Elastic Demand: A perfectly elastic demand curve is horizontal, indicating that consumers are willing to purchase any quantity of the good at a specific price but are unwilling to buy any quantity at a higher price. This implies that the demand is extremely sensitive to changes in price, and consumers are not willing to pay more than a certain price for the good.
Normal-Shaped Supply Curve: A normal-shaped supply curve indicates that as the price of the good increases, producers are willing to supply more of it. The supply curve slopes upward to the right, reflecting the positive relationship between price and quantity supplied.
Tax Burden: When a tax is imposed on a good, it adds to the cost of production for the suppliers. In the case of a perfectly elastic demand curve, any increase in the price due to the tax will cause consumer demand to drop to zero. Consumers are not willing to pay the higher price for the good, given their high price sensitivity.
As a result:
- The suppliers will bear the entire tax burden. They will have to absorb the tax amount from their revenue since they cannot pass on any part of the tax to consumers due to the perfectly elastic demand. The price that consumers are willing to pay remains unchanged.
- The suppliers’ revenue and profits will decrease by the full amount of the tax.
- There will be no change in the quantity produced, as producers continue to supply the same quantity at the same price as before the tax.
In this scenario, the tax incidence falls entirely on the suppliers, and consumers are not affected at all because they are not willing to buy the good at a higher price. This situation is unique to the combination of a perfectly elastic demand curve and a normal-shaped supply curve.