In the widget market, it is known that producers are relatively responsive to price changes, as compared to consumers.

The government places a $5 per unit tax on sales of widgets. Which of the following is the most likely result?

A. Consumers and producers will split the tax evenly.

B. Most of the tax will be paid by producers.

C. Most of the tax will be paid by consumers.

D. Who pays the tax will be determined by the government.

The answer is C. The rule to finding which side of the market is burdened more is to find the more inelastic curve, supply or demand. In this problem, we are told the producers have a more elastic curve than the consumers. This means that if the price increases after the tax, producers will cut back on production, while consumers will not since their curve is more inelastic. This means that consumers will bear the larger share of the tax burden because of their purchasing habits. When the price rises after the tax, consumers will not cut back as much, and will pay a larger share of the tax.

This means that answers A and B can not be true based on the elasticity. Answer D is just a distractor, the government set the price of the tax, but the market decides who bears a larger burden.