Rule 3: Parties who have inelastic supply or

demand, they bear taxes and parties who have

elastic supply or demand, just avoid taxes:
Perfectly Inelastic Demand: Let’s assume that
consumers have a perfectly inelastic demand for octane,
as shown in Figure 3-A. Initially, the price for 100

Fig: 3-A Fig: 3-B Fig: 3-C (a) Fig: 3-C (b)

billion gallons is P1 (BDT 1.50). When the tax is

imposed on producers, they take this as equivalent to a
50 Paisa rise in marginal cost, raising the price that they
require to supply any quantity; supply falls, and the
supply curve shifts from S1 to S2. The new equilibrium
market price is BDT 2.00 (P2). So, when demand is
perfectly inelastic, the tax burdens are consumer burden
= (post-tax price - pre-tax price) + tax payments by
consumers = P2 - P1 + 0 = 2.00 - 1.50 = 0.50 (BDT).
Producer burden = (pre-tax price - post-tax price) + tax
payments by producers = P1 - P2 + 0.50 = 1.50 - 2.00 +
0.50 = 0 (BDT). So, we can conclude, when demand is
perfectly inelastic, producers bear none of the tax and
consumers bear all of the tax.

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Perfectly Elastic Demand: Now, as shown in Figure 3-
B, initially, the market is in equilibrium at P1 = BDT
1.50 and Q1=100 billion gallons. In this issue, when a
50 Paisa tax causes the supply curve to shift from S1 to
S2, the equilibrium price remains at P1=1.50, but the
quantity falls to Q2, 80 billion gallons. When demand is
perfectly elastic, the tax burdens are: Consumer = P1- P2
= 1.50 - 1.50 = 0; Producer = P1 - P1 = 1.50 - 1.50 +
0.50 = 0.50. So, here, producers bear the whole tax, and
consumers bear none.
Supply Elasticity: As per the supply elasticity is
concern, it creates an impact on the tax burden too. If
there are a lot of alternatives for suppliers, then the
supply curve becomes more elastic. However, a steel
manufacturer has inelastic supply in the short run. The
Figure 3-C, panel (a) shows the impact of a tax on the
steel producers. Point A depicts the initial equilibrium
of the steel market. As the steel company pays 50 Paisa
to the government for the steel produced per unit, it
produces the same amount; hence the supply curve
shifts upward from S1 to S2 and price also rise from P1
to P2. Quantity of steel sold falls from Q1 to Q2. Now,
the new equilibrium is at point B. Figure 3-C, panel (b)
depicts the impact of an equally sized tax. Producer is
willing to provide a quantity, Q1 of goods at a price of
P1. If the government makes them pay a 50 Paisa/good
they sell, they move out from the alternative. As a
result, the supply curve shifts from S1 to S2 and the
price rises from P1 to P2. The quantity of goods sold fall

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apart from Q1 to Q2 point (B). As a result, the consumer
has to bear the majority share of the tax. In this way,
the same principles are held for supply and for demand
elasticity. So, we may conclude with this statement
that, elastic factors pave the way of avoiding tax, while
inelastic factors bear them.