When a tax is imposed on a good, who bears the greater burden of the tax?

Question

Accepted Answer

The side of the market that is more inelastic. When a tax is imposed on a good, the greater burden (incidence) of the tax falls on the side of the market that is more inelastic - that is, the side that is less responsive to price changes. If demand is more inelastic than supply, consumers bear most of the tax burden because they cannot easily reduce their purchases when the price rises. If supply is more inelastic, producers bear most of the burden because they cannot easily reduce production.

The claim that buyers always bear the greater burden is incorrect - the distribution depends on the relative elasticities of supply and demand, not on who the tax is legally imposed upon. Similarly, the assertion that sellers always bear the greater burden ignores the role of elasticity in determining tax incidence. The idea that the more elastic side bears the greater burden is the opposite of the correct answer - the more elastic side has more alternatives and can more easily adjust their behavior to avoid the tax, shifting the burden to the less elastic side.

Tax incidence is an important topic on the CLEP Microeconomics exam. Students should understand that the statutory incidence (who writes the check to the government) differs from the economic incidence (who ultimately bears the burden), and that relative elasticities determine the actual burden distribution regardless of whether the tax is levied on buyers or sellers.

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