When the demand for a product is less elastic than the supply, who pays the majority of the tax on that product?

When the demand for a product is less elastic than the supply, consumers bear a larger share of the tax burden. This is due to the nature of elasticity; demand that is less elastic means that consumers are less sensitive to changes in price. In other words, even if the price rises due to a tax being imposed, consumers will continue to purchase the product because they perceive it as a necessity or they have limited substitutes.

On the other hand, if the supply is more elastic, producers can adjust their production more easily in response to price changes. When a tax is levied, suppliers can pass a significant portion of the tax onto consumers in the form of higher prices since consumers will continue to buy despite the price increase. Thus, in this scenario, it is the consumers who end up paying a larger percentage of the tax, while firms are less affected because they can adjust their output effectively in response to the tax and the price elasticity of demand.

This principle is fundamental in understanding tax incidence in economics, where the distribution of the tax burden is determined by the relative elasticities of demand and supply. The less elastic the demand, the more consumers will retain the burden of the tax.