When a tax is levied on buyers of tea, a. buyers of tea and sellers of tea both are made worse off. b. buyers of tea are made worse off, and the well-being of sellers is unaffected. c. buyers of tea are made worse off, and sellers of tea are made better off. d. the well-being of both buyers of tea and sellers of tea is unaffected.

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Business

Jaden

6 August, 02:24

When a tax is levied on buyers of tea, a. buyers of tea and sellers of tea both are made worse off. b. buyers of tea are made worse off, and the well-being of sellers is unaffected. c. buyers of tea are made worse off, and sellers of tea are made better off. d. the well-being of both buyers of tea and sellers of tea is unaffected.

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Alicia Huber · Answer 1

The correct answer is option a.

Explanation:

The imposition of tax on tea will create a tax wedge. The price paid by the buyers will increase and the price received by sellers will decrease. The tax burden will be shared between the buyers and sellers.

Who shares the major portion of the tax burden depends on their response to price change. Whoever has a more inelastic response to the price change will bear the major share of the tax burden. But the welfare of both buyers and sellers will get reduced.