WAEC Economics 2014 Theory — Question 20

Model answer

With a perfectly elastic demand (horizontal demand curve), the producer bears the entire burden of the tax. The supply curve shifts upward by the amount of the tax, but the price paid by consumers remains unchanged (at the original price level); quantity demanded and supplied falls, since the producer cannot pass the tax on to the price-sensitive consumers. [Diagram: horizontal demand curve D; supply curve shifts from S to S+tax; price stays at P₀; quantity falls from Q₀ to Q₁]