Editing Price elasticity of demand (section)

==Effect on tax incidence==
[[File:Tax incidence (mixed).svg|thumb|upright=2|When demand is more inelastic than supply, consumers will bear a greater proportion of the tax burden than producers will.]]
{{Main article|tax incidence}}
Demand elasticity, in combination with the [[price elasticity of supply]] can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is ''perfectly inelastic'', by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant.  Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is ''perfectly elastic'', by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero.  As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.<ref name="wall57">Wall, Stuart; Griffiths, Alan (2008). pp.&nbsp;57–58.</ref>

In practice, demand is likely to be only ''relatively'' elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity. More generally, then, the ''higher'' the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more ''inelastic'' the demand compared to supply, the heavier the burden on consumers.  The general principle is that the party (i.e., consumers or producers) that has ''fewer'' opportunities to avoid the tax by switching to alternatives will bear the ''greater'' proportion of the tax burden.<ref name="wall57"/>

PED and PES can also have an effect on the deadweight loss associated with a tax regime.  When PED, PES or both are inelastic, the deadweight loss is lower than a comparable scenario with higher elasticity.