Tax Incidence
Tax Incidence
When the government imposes taxes on a market, the incidence of the tax refers to who (producers or consumers) pays the tax burden. Tax incidence depends on price elasticities of supply and demand. This model shows what percentage of a tax is paid by consumers and producers, and you will see that the group with the smaller elasticity bears the more significant burden of the tax. When the elasticities are equal, both groups contribute equally to the tax burden.