In 2020 to provide some relief to the airline industry, the Cares Act temporarily suspended (eliminated) per-unit taxes on the transportation of people and goods by air in the U.S.

Then, if the supply of air travel was much less elastic than the demand,

Question

In 2020 to provide some relief to the airline industry, the Cares Act temporarily suspended (eliminated) per-unit taxes on the transportation of people and goods by air in the U.S.

Then, if the supply of air travel was much less elastic than the demand,

BlackTom AI · Accepted Answer

The question asks us to analyze who benefits when a per-unit tax on air transportation is eliminated, given that the supply of air travel is much less elastic than the demand.
First, recall the basic idea of tax incidence: the side of the market that is more price inelastic bears a larger share of the tax burden. In this case, the supply side (airlines) is more inelastic than the demand side (passengers).
Because supply is the relatively inelastic side, airlines would bear a larger portion of the tax burden when the tax existed. When the tax is eliminated, the burden on airlines is removed to a greater extent than on consumers, which translates into a larger gain in producer surplus and a more favorable price outcome for airlines than for buyers.
Option analysis across the available choice:
- If the elimination of the tax primarily benefits consumers, that would imply the demand side bears less burden and producers less, which contradicts the given condition that supply is much less elastic than demand. This makes such an interpretation inconsistent with tax incidence principles under asymmetric elasticities.
- If the option suggested that the tax reduction shifts benefits mainly to airline consumers despite the inelastic supply, it would require the tax to be largely borne by buyers, which is unlikely given the reported relative elasticities. The more rigid (inelastic) side should capture the benefits when the tax is removed.
- If there were an option claiming no meaningful effect on airline viability or profits, that would ignore the incidence effect described by elasticity differences and would be an incomplete reading of the economic dynamic.
- If an option asserted that the elimination of the tax would harm airlines or have no effect, that would misunderstand the impact of removing a cost layer that was primarily borne by the producers due to their inelastic supply.
Given the principle that the inelastic side bears most of the tax burden, removing the tax tends to disproportionately improve airline producer welfare, since the cost that disproportionately hurt them is removed. The stated option, that the elimination benefited airline companies for the most part, aligns with this reasoning.
In summary, the key misconception to avoid is assuming the more elastic side would gain the lion’s share of benefits from tax repeal; instead, the inelastic supplier side (airlines) is expected to benefit the most from elimination of a tax they were bearing disproportionately.

SIPAIA6400_001-002_2025_3 - Microeconomic Analysis for International and Public Affairs Problem Set 2, Individual Portion

In 2020 to provide some relief to the airline industry, the Cares Act temporarily suspended (eliminated) per-unit taxes on the transportation of people and goods by air in the U.S. Then, if the supply of air travel was much less elastic than the demand,

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