Consider the following statements about how the burden of an indirect tax is shifted between consumers and producers when demand and supply have different elasticities. Which of the statements given below is or are correct?

Introduction / Context:
This question examines your understanding of tax incidence, that is, how the economic burden of a tax is shared between buyers and sellers. In particular it links the direction of shifting of an indirect tax to the relative price elasticities of demand and supply. Many candidates memorise that taxes can be shifted forward or backward, but they do not always connect this idea to elasticity. Here you are given two general statements and asked to judge whether each statement correctly describes the effect of relative elasticity on the shifting of the tax burden.

Given Data / Assumptions:
- Statement 1 says that a tax is shifted forward to consumers if demand is inelastic relative to supply.
- Statement 2 says that a tax is shifted backward to producers if supply is relatively more inelastic than demand.
- The question assumes standard competitive market conditions for an indirect tax on a good or service and uses basic microeconomic theory of elasticity and incidence.

Concept / Approach:
Tax incidence theory tells us that the side of the market which is relatively less price elastic bears a larger share of the burden of a tax, because that side adjusts quantity less when price changes. If demand is inelastic compared with supply, buyers cannot easily reduce their purchases when price rises, so the burden is pushed forward onto them. This is called forward shifting. If supply is inelastic relative to demand, producers cannot easily cut output when price falls, so they bear more of the tax burden through lower net receipts, which is called backward shifting. Therefore we should compare each statement with this general principle.

Step-by-Step Solution:
Step 1: Analyse statement 1. It says that a tax is shifted forward to consumers if demand is inelastic relative to supply. When demand is less elastic, buyers are less sensitive to price increases. As a result, producers can raise prices by almost the full amount of the tax without losing much quantity sold, so most of the tax gets passed on to consumers. This is exactly what standard incidence theory predicts.Step 2: Conclude about statement 1. Since this matches the general rule that the less elastic side bears more burden, statement 1 is correct.Step 3: Analyse statement 2. It says that a tax is shifted backward to producers if supply is relatively more inelastic than demand. When supply is less elastic, producers cannot easily reduce quantity supplied when the price they receive falls after the tax is imposed. They must continue selling roughly the same quantity, so they absorb a bigger part of the tax in the form of lower net revenue per unit.Step 4: Conclude about statement 2. This again lines up with the rule that the less elastic side bears more of the tax, so statement 2 is also correct.

Verification / Alternative check:
You can visualise standard demand and supply diagrams. With inelastic demand and elastic supply, the demand curve is steep and the supply curve is relatively flat. The price paid by consumers rises strongly while the price received by producers falls only slightly, so consumers bear more of the tax. With inelastic supply and elastic demand, the supply curve is steep and the demand curve is relatively flat. In that case the price received by producers falls sharply while the price paid by consumers rises less, so producers bear more of the burden. This graphical check confirms both statements.

Why Other Options Are Wrong:
Option A is wrong because it assumes only statement 1 is correct and ignores the fact that statement 2 also follows directly from elasticity principles. Option B is wrong because it treats statement 2 as the only correct one, which is incomplete. Option D is wrong because it claims that neither statement is correct, which contradicts standard microeconomics and basic tax incidence diagrams. Since both statements faithfully apply the rule that the less elastic side of the market bears more of the tax burden, the only valid choice is that both 1 and 2 are correct.

Common Pitfalls:
Many students confuse elasticity with slope and think only about which curve is steeper without relating that to responsiveness of quantity. Others believe that producers always bear the tax because they are the ones remitting it to the government, or that consumers always pay because the price they see increases. In reality, legal incidence and economic incidence are different ideas, and the true burden depends on relative elasticities. Remembering that the side that can escape more easily through quantity adjustment bears less of the tax helps to avoid these conceptual errors.

Final Answer:
Both statements correctly describe tax shifting, so the right answer is Both 1 and 2.