Texas A&M University (TAMU) ECON202 Practice Exam 2

The tax incidence on sellers is likely to be higher when buyers are more sensitive to price changes. This sensitivity means that buyers will significantly alter their purchasing behavior based on price fluctuations. If buyers react strongly to price changes, they may reduce the quantity they purchase if the sellers attempt to pass the tax burden onto them through higher prices.

As a result, sellers may have no choice but to absorb more of the tax burden themselves to maintain sales volume, since they risk losing customers if they increase prices too much. In essence, when buyers are highly responsive to price changes, the economic burden of the tax shifts more onto the sellers, making the tax incidence higher for them.

In contrast, situations where buyers are less sensitive to price changes often lead to sellers having the ability to raise prices without significantly affecting the quantity sold. This allows sellers to pass on more of the tax burden to buyers. Understanding this relationship helps in analyzing market dynamics and the effects of taxation on supply and demand.