smoking, the demand is inelastic because consumers are addicted to the product. The government can then

pass the tax burden along to consumers in the form of higher prices, without much of a decline in the

equilibrium quantity.

Similarly, when a government introduces a tax in a market with an inelastic supply, such as, for example,

beachfront hotels, and sellers have no alternative than to accept lower prices for their business, taxes do not

greatly affect the equilibrium quantity. The tax burden now passes on to the sellers. If the supply was elastic

and sellers had the possibility of reorganizing their businesses to avoid supplying the taxed good, the tax

burden on the sellers would be much smaller. The tax would result in a much lower quantity sold instead of

lower prices received. Figure 5.10 illustrates this relationship between the tax incidence and elasticity of

demand and supply.
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