(b) describes the example of the tobacco excise tax where the supply is more elastic than demand. The tax

incidence now falls disproportionately on consumers, as shown by the large difference between the price they

pay, Pc, and the initial equilibrium price, Pe. Sellers receive a lower price than before the tax, but this

difference is much smaller than the change in consumers’ price. From this analysis one can also predict

whether a tax is likely to create a large revenue or not. The more elastic the demand curve, the more likely that

consumers will reduce quantity instead of paying higher prices. The more elastic the supply curve, the more

likely that sellers will reduce the quantity sold, instead of taking lower prices. In a market where both the

demand and supply are very elastic, the imposition of an excise tax generates low revenue.

Some believe that excise taxes hurt mainly the specific industries they target. For example, the medical device
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