If demand is perfectly inelastic, a tax imposed

Analyze the question: We need to know who bears the burden of a tax when demand is perfectly inelastic (elasticity of demand = 0).

Concept: Tax incidence The burden of a tax is shared between buyers and sellers depending on the relative elasticities of demand and supply:

• The less elastic side of the market bears more of the tax.
• The more elastic side bears less of the tax.

Step-by-step solution:

1. Perfectly inelastic demand (Ed = 0) means consumers will buy the same quantity no matter how high the price goes. The demand curve is a vertical line.
2. When a tax is imposed, the supply curve shifts upward (left) by the amount of the tax.
3. Because the demand curve is vertical, quantity bought does not change, and the price rises by the full amount of the tax.
4. The producer can therefore pass the whole tax on to the consumer, so the producer's net price received is unchanged.
5. The consumer pays the full tax through the higher price.

Checking the options:

• A. Borne only by the producer: wrong, this happens when demand is perfectly elastic.
• B. Borne only by the consumer: correct.
• C. Greater impact on the seller: wrong, the seller passes it on.
• D. No impact on the buyer: wrong, the buyer pays the whole tax.

Exam tip: Remember "Inelastic = Consumer pays." The side that cannot easily walk away (the less elastic side) is the one that carries the tax. Likewise, if demand is perfectly elastic, the producer bears the tax. This is why governments often tax goods with inelastic demand, like cigarettes, alcohol, and petrol, to raise revenue.