– Pp. The more elastic the demand and supply curves, the lower the tax revenue.

In Figure 5.10 (a), the supply is inelastic and the demand is elastic, such as in the example of beachfront hotels.

While consumers may have other vacation choices, sellers can’t easily move their businesses. By introducing a

tax, the government essentially creates a wedge between the price paid by consumers Pc and the price

received by producers Pp. In other words, of the total price paid by consumers, part is retained by the sellers
126 5 • Elasticity

and part is paid to the government in the form of a tax. The distance between Pc and Pp is the tax rate. The new

market price is Pc, but sellers receive only Pp per unit sold, as they pay Pc-Pp to the government. Since we can

view a tax as raising the costs of production, this could also be represented by a leftward shift of the supply

curve, where the new supply curve would intercept the demand at the new quantity Qt. For simplicity, Figure
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