Correct Option: C. will be borne by the buyer alone
Detailed Explanation:
- Understanding Demand Elasticity:
- Inelastic Demand: When we say that the demand for a commodity is "infinitely inelastic," it means that consumers will buy the same quantity of the good regardless of its price. This is represented graphically as a vertical demand curve. No matter how much the price increases, the quantity demanded remains constant.
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Example: Think of a life-saving medication that people need regardless of its price. Even if the price doubles, patients will still buy the same amount because they cannot do without it.
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Tax Incidence:
- Tax Incidence refers to how the burden of a tax is distributed between buyers and sellers. It depends on the relative elasticities of demand and supply.
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In the case of infinitely inelastic demand, the entire burden of the tax falls on the buyers. This is because they are not responsive to price changes; they will continue to purchase the same quantity even if the price increases due to the tax.
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Graphical Representation:
- Imagine a vertical demand curve (D) and a standard upward-sloping supply curve (S). When a tax is imposed, the supply curve shifts upward by the amount of the tax.
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The new equilibrium price will be higher, but the quantity sold remains the same due to the vertical demand curve. The price increase is fully passed on to the buyers, meaning they pay the full amount of the tax.
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Mathematical Explanation:
- Let’s say the original price of the commodity is ( P_0 ) and the quantity demanded is ( Q_0 ). If a tax ( T ) is imposed, the new price that buyers pay becomes ( P_0 + T ).
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Since demand is perfectly inelastic, the quantity remains ( Q_0 ). The sellers receive ( P_0 ) (the price before tax) while buyers pay ( P_0 + T ). Thus, the entire tax burden is on the buyers.
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Why Other Options Are Incorrect:
- Option A: A. is zero: This is incorrect because the tax burden is not zero; it is simply borne entirely by the buyers.
- Option B: B. will be borne by the seller alone: This is incorrect because sellers can only pass on the tax burden to buyers when demand is inelastic. In this case, sellers do not absorb the tax burden.
- Option D: D. will be borne by both buyer and seller: This is incorrect because, with infinitely inelastic demand, the entire burden of the tax is passed on to the buyers. Sellers do not share the burden in this scenario.
Common Pitfalls:
- Confusing Elasticities: Students often confuse elastic and inelastic demand. Remember, inelastic demand means consumers are not sensitive to price changes.
- Assuming Shared Burden: It’s easy to assume that taxes are always shared between buyers and sellers, but this is not the case with perfectly inelastic demand.
Revision Summary:
- Infinitely inelastic demand means quantity demanded does not change with price changes.
- Tax burden falls entirely on buyers when demand is perfectly inelastic.
- Graphically, the demand curve is vertical, and the supply curve shifts up with the tax.
- Key takeaway: In cases of perfectly inelastic demand, sellers do not bear any of the tax burden.