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

demand and supply.

FIGURE 5.10 Elasticity and Tax Incidence An excise tax introduces a wedge between the price paid by consumers

(Pc) and the price received by producers (Pp). The vertical distance between Pc and Pp is the amount of the tax per

unit. Pe is the equilibrium price prior to introduction of the tax. (a) When the demand is more elastic than supply, the

tax incidence on consumers Pc – Pe is lower than the tax incidence on producers Pe – Pp. (b) When the supply is

more elastic than demand, the tax incidence on consumers Pc – Pe is larger than the tax incidence on producers Pe

– 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.
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