Question

How does "elasticity" affect "tax incidence"?

Answer 1

Tax Incidence is the process by which, the tax burden is divided between buyers and sellers. The tax incidence depends on the price elasticity of demand and supply respectively. The elasticity of demand and supply determines which group (buyers, sellers) will have a higher tax burden. If demand is more elastic than supply, the sellers has to bear a larger part of the tax burden. On the other hand if supply is more elastic than demand, the buyers has to bear a larger share of the tax burden. Again, if demand is perfectly elastic and supply is perfectly inelastic, the sellers has to bear the whole tax burden. If the demand is perfectly inelatic and supply is perfectly elastic, the buyers has to bear the whole share of the tax burden. Thus, the share of tax burden is determined by the elasticity of supply and demand, and if the elasticity of the demand and supply changes, the share of tax burden is also affected.