(a) In a labor market where demand is elastic and supply inelastic, we begin with supply curve S₁, demand D, and equilibrium price and quantity (W₁, L₁). The implementation of the tax, W_b – W_s, shifts the supply curve inward from S₁ to S₂ and decreases the equilibrium quantity of labor from L₁ to L₂. Because laborers in this market are not very sensitive to price and employers are, the effect of the tax on the wages laborers receive is much larger than its effect on the wage employers pay, W_b – W₁ < W₁ – W_s.
(b) In the market for cigarettes where demand is inelastic and supply elastic, we begin with supply curve S₁, demand D, and equilibrium price and quantity (P₁, Q₁). The implementation of the tax, P_b – P_s, shifts the supply curve inward from S₁ to S₂ and decreases the equilibrium quantity of cigarettes from Q₁ to Q₂. Because smokers in this market are not very sensitive to price and cigarette companies are, the effect of the tax on the price consumers pay is much larger than its effect on the price companies receive, P_b – P₁ > P₁ – P_s.