What happens if supply is more elastic than demand?
In the above diagram we see that when the government imposes a tax, price will have to rise from Pe to Pt in order for the producer to be able to afford the tax. However, the producer being a rational actor doesn t want to have the excess supply caused by the reduced demand due to the higher price caused by the tax so he reduces production shifting the supply curve from S to S1. As a result there is loss in both producer and consumer surplus. Since demand is more elastic than supply and consumers are more sensitive to price changes the producer can t afford to make significant increases in price without losing market share and subsequently reducing his profits. Thus the greatest incidence of taxation will be paid by the producer which is illustrated by the yellow box whereas a smaller amount, illustrated by the blue box will be paid by the consumer. So the producer will pay Pp-Pe which is greater than Pe-Pt which is paid by the consumer. However the reduction in production will mean th
