2018 · Q119
Consider the following statements about impact of tax:
- 1A tax is shifted forward to consumers if the demand is inelastic relative to supply.
- 2A tax is shifted backward to producers if the supply is relatively more inelastic than demand.
Which of the statements given above is/are correct?
General KnowledgeIndian Economy
- A1 only
- B2 only
- CBoth 1 and 2
- DNeither 1 nor 2
Explanation
When demand is inelastic relative to supply, buyers cannot easily cut consumption, so the tax is shifted forward to consumers (1 correct). When supply is relatively more inelastic, producers cannot easily cut output, so the tax is shifted backward to producers (2 correct). Hence both statements are correct.