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Chapter 18: Problem 1

What does tax incidence mean?

Short Answer

Expert verified
Tax incidence refers to who ultimately bears the burden of a tax, typically falling on consumers, producers, or both, depending on the elasticity of supply and demand. If the demand for a good or service is elastic, producers bear more of the tax burden. If demand is inelastic, consumers bear a larger portion of the tax burden.

Step by step solution

01

Define Tax Incidence

Tax incidence is a term used in economics to describe who ultimately bears the burden of a tax. While the government imposes the tax, typically, the burden falls on consumers, producers, or both and is determined by the elasticity of supply and demand.
02

Discuss Parties Involved

There are two main parties involved in any transaction - the consumers and the producers. In the context of tax incidence, consumers are the ones buying products or services, and producers are the ones selling products or services.
03

Explain Effects on Consumers and Producers

The division of the tax burden between consumers and producers depends on the relative price elasticity of supply and demand. If the demand for a good or service is elastic (highly responsive to price changes), the incidence of tax falls more on producers. If demand is inelastic (not highly responsive to price changes), consumers bear a larger portion of the tax burden.

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Most popular questions from this chapter

(Related to the Apply the Concept on page 626) In an article in the Wall Street Journal, Edward Lazear of Stanford University was quoted as saying, "There is some good news.... Most of the inequality reflects an increase in returns to 'investing in skills." Why would it be good news if it were true that most of the income inequality in the United States reflected an increase in returns to investing in skills?

According to an article in the New York Times, when the French government imposed a new tax on sales of beer, t estimated that the retail price of beer would rise by he equivalent of 6 cents per half pint. A spokesman for he beer industry argued that the actual increase in price would be 25 cents per half pint. Discuss the differences between the French government's and the beer industry's estimates of the price elasticity of demand for beer.

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