Lesson preview · Taxes And Subsidies
Tax Incidence
~6 min · Free to read
Tax incidence tells us who really bears the burden of a tax — regardless of who writes the cheque to the government. A tax creates a wedge between the price buyers pay () and the price sellers receive (). The tax . Even when the tax is legally imposed on sellers, part of the burden lands on buyers through a higher price.
Key Term
Tax Incidence and Elasticity
The burden of a tax falls more heavily on the less elastic side of the market. If demand is less elastic than supply, buyers bear more of the tax. If supply is less elastic than demand, sellers bear more. This holds regardless of whether the tax is legally placed on buyers or sellers.
The ratio of the tax burden on buyers vs. sellers equals the ratio of supply elasticity to demand elasticity
It doesn’t matter who the tax is legally imposed on. Whether you tax producers or consumers, the economic outcome is identical. The market adjusts so the burden splits according to relative elasticities. The more inelastic side can’t escape the tax (they’re less responsive to price changes), so they bear more of the burden.
Worked Example
Demand: . Supply: . A 10 dollars per-unit tax is imposed. Find the new prices paid by buyers and received by sellers.
Check yourself · no marks
Why does it not matter whether a tax is imposed on buyers or sellers?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
Tax incidence depends on:
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