Tax Incidence

Tax incidence refers to how the burden of a tax is distributed between buyers and sellers in the marketplace. When a government imposes a tax, it can affect prices, wages, and overall economic behavior. For example, if a tax is levied on producers, they may raise prices for consumers or absorb costs themselves. Ultimately, the incidence of the tax depends on the relative elasticity of demand and supply; that is, how sensitive buyers and sellers are to price changes. Understanding tax incidence helps in assessing who really pays for the tax and its impact on the economy.