1. will be borne by the consumer if the demand is perfectly elastic.
2. will be borne by the producer if the supply is perfectly elastic.
3. will be borne by the consumer if the supply is perfectly elastic.
4. will be borne equally by consumer and producer regardless of whether the tax is levied on the consumer or on the producer.
Choose the option that yields the correct answer.
Option 3 is the correct one. If the supply is perfectly elastic the marginal private and social costs of providing the commodity are constant at all levels of output. There is no producer rent and therefore none can be lost as a result of the tax. The price received by the producer remains the same as in the pre-tax situation and the price to the consumer rises by the amount of the tax. All the revenue from the tax is taken from the consumer surplus or rent.
If the demand is perfectly elastic consumers will pay the same price for the product regardless of the amount sold. Consumers receive no surplus in the pre-tax situation and therefore lose none as a result of the tax. The price paid by the consumer remains the same as in the pre-tax situation and the price to the producer falls by the amount of the tax. The tax revenue to the government comes entirely from producer rent.
Option 4 confuses the principle that the incidence of the tax on the producer and consumer will be the same whether the tax is levied on the producer or the consumer with the issue of whether the consumer will end up bearing a bigger or smaller amount of the tax than the producer. The latter issue will depend on the shapes of the demand and supply curves. The former principle holds regardless of the shapes of the curves as long as neither the demand or supply are perfectly elastic.