Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Correct answer
Explanation
The correct answer is C, Both 1 and 2. The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
This is the rule of tax incidence. When a tax is imposed, sellers try to raise the price. If buyers keep buying almost the same quantity (inelastic demand), the price rises and most of the tax is passed forward to consumers, as with salt, medicines or petrol. If instead producers cannot cut output easily (inelastic supply) while buyers are sensitive to price, sellers cannot raise the price much and absorb most of the tax themselves, so it is shifted backward to producers.
A is wrong because statement 2 is also correct. B is wrong because statement 1 is also correct. D is wrong because both statements state the standard incidence rule correctly.
Exam tip: The less elastic side pays more of the tax: inelastic demand means consumers bear it, inelastic supply means producers bear it.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
Show answer
Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
Show answer
UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
Show answer
The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
Read the full explanation →In India, the term 'hot money' is used to refer to
- A.Currency + Reserves with the RBI
- B.Net GDR
- C.Net Foreign Direct Investment
- D.Foreign Portfolio Investment
Show answer
Hot money is foreign capital that flows in quickly to earn short-term returns and can leave just as quickly, and in India this describes portfolio investment in shares and bonds.
Read the full explanation →