Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?

Tax incidence, or the distribution of the tax burden, is determined by the relative price elasticity of demand and supply. Statement 1 is correct because when demand is inelastic relative to supply, consumers are less sensitive to price changes, allowing producers to shift the tax burden forward to them [2]. In such cases, consumers bear the majority of the tax cost. Statement 2 is also correct because if supply is more inelastic than demand, producers are less able to adjust their output or shift to other markets in response to price changes [2]. Consequently, the tax is shifted backward, and the sellers or producers bear the primary burden of the tax [1]. Essentially, the tax burden falls more heavily on the side of the market that is more inelastic (less responsive to price changes) [2].

Sources

1. [1] https://oertx.highered.texas.gov/courseware/lesson/1888/student/?section=4
2. [2] https://www.investopedia.com/terms/t/tax_incidence.asp