Introducing Supply and Demand
Taxation Impact on Economic Output
Tax incidence falls mostly upon the group that responds least to price, or has the most inelastic price-quantity curve.
Analyze how changes in taxes affect the price of a good for sellers and buyers
- When supply is inelastic and demand is elastic, the tax incidence falls on the producer.
- When supply is elastic and demand is inelastic, the tax incidence falls on the consumer.
- Tax incidence is the analysis of the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it.
- A marginal tax is an increase in a tax on a good that shifts the supply curve to the left, increases the consumer price, and decreases the price for the sellers.
- elastic: Sensitive to changes in price.
- Tax incidence: The effect a particular tax has on the two parties of a transaction.
Tax incidence is the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand. To understand how elasticities influence tax incidence, its important to consider the two extreme scenarios and how the tax burden is distributed between the two parties.