Question

The first and most important rule of tax incidence is that tax laws do not accurately identify who actually bears the burden of the tax. The statutory incidence of a tax is determined by who pays the tax to the government. For example, the statutory incidence of a tax paid by producers of gasoline is on those very producers. Statutory incidence, however, ignores the fact that markets react to taxation. This market reaction determines the economic incidence of a tax, the change in the resources available to any economic agent as a result of taxation. The economic incidence of any tax is the difference between the individual’s available resources before and after the tax has been imposed. Thus the side of the market on which the tax is imposed is irrelevant to the distribution of tax burdens.

So please give a brief description of who bears the burden of the tax (consumer or producers) based on the elasticities of the supply and demand curve (consider perfectly inelastic, elastic, and perfectly elastic cases).

Case I: Supply is perfectly inelastic.  Does the elasticity of the demand curve affect your answer?

Case II: Supply is elastic.  Does the elasticity of the demand curve affect your answer?

Case III: Supply is perfectly elastic.  Does the elasticity of the demand curve affect your answer?

Answer 1