where demand is inelastic, companies largely can pass the cost increase along to consumers in the form of higher

prices, without much of a decline in equilibrium quantity. In (b), demand is elastic, so the shift in supply results

primarily in a lower equilibrium quantity. Consumers do not benefit in either case, but in (a), they pay a higher price

for the same quantity, while in (b), they must buy a lower quantity (and presumably needing to shift their

consumption elsewhere).

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5.3 • Elasticity and Pricing 125

Elasticity and Tax Incidence

The example of cigarette taxes demonstrated that because demand is inelastic, taxes are not effective at

reducing the equilibrium quantity of smoking, and they are mainly passed along to consumers in the form of

higher prices. The analysis, or manner, of how a tax burden is divided between consumers and producers is
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