Who Truly Pays? Exploring Tax Incidence and Elasticity

Summary

The blog explains the concept of tax incidence, detailing how the burden of taxes is distributed between buyers and sellers. It illustrates that elasticity of supply and demand determines whether consumers or producers bear the cost, using examples like cigarettes and fine jewelry. It underscores the implications for consumer prices, producer profits, and tax fairness.

Key Takeaways

Tax incidence shows who ultimately pays the tax.
Elasticity determines how tax burdens shift between consumers and producers.
Inelastic demand leads to consumers bearing more tax, while elastic demand shifts more burden to producers.
Understanding tax incidence is crucial to assessing tax fairness and economic impact.