Tax Incidence and Elasticity of Demand & Supply

In Canada and other free societies, the government provides social services in order to protect the freedoms of its citizens and to uphold the well-being of society as a whole. The government funds these services through revenue acquired by taxing three economic bases: income, wealth and consumption. This report will focus on consumption tax, also referred to as sales tax. Three popular commodities that are subject to sales tax in Canada are gasoline, cigarettes and automobiles. Interestingly, both the consumers and the producers of these items may bear some or all of the sales tax burden. How is this possible? By analyzing the elasticity of demand and supply for automobiles, gasoline and cigarettes, the answer becomes clear.
To begin, automobiles are a commodity worth investigating in regards to tax incidence. The automobile is an asset that most Canadians will consider investing in, as nearly everyone requires a means of transportation. Like any other product or service sold, where the tax burden on automobiles falls depends on the commodity’s elasticity of supply and demand.
The demand on automobiles is quite elastic in regards to price. In general, the automobile industry in Canada bears an elasticity of demand of about -4. This elasticity of demand is a result of the fact that consumers have a choice when it comes to deciding upon a means of transportation. If one does not like the pricing on a particular make or model of vehicle, they have the option to select from dozens of cheaper alternatives made by different manufacturers. Consumers also have the option to completely avoid buying a vehicle altogether when public transportation is available as a viable alternative. The supply in regards to the price of automobiles is relatively elastic as well. Automobile manufactures react to changes