Tax Incidence

Definition

Tax incidence refers to who bears the burden (pays) of a tax - whether it falls more heavily on buyers (demanders) or sellers (suppliers) in a market. It is determined by the relative price elasticities of demand and supply.

Related terms

Price Elasticity of Demand/Supply: Price elasticity measures how responsive quantity demanded or supplied is to changes in price. It helps determine the tax burden in tax incidence.

Subsidy: A subsidy is a payment made by the government to producers, which effectively reduces their costs. The burden of a subsidy can also be analyzed using tax incidence.

Shifting/Burden-Sharing: Shifting refers to when either buyers or sellers adjust their behavior in response to taxes, resulting in a change in who ultimately bears the burden of the tax.