Question

Answer the following questions with short paragraphs. Use economic reasoning to defend it. Make sure to answer all parts!

What is tax incidence? How does it relate to price elasticity of supply/demand? How might understanding tax incidence be important when evaluating public policy proposals?

Answer 1

Tax incidence is the term used for fall of the burden on the consumer or the producer in the market, for example, if the tax put on a good is worth $10, and after tax the cosnumer have to pay $5 more than before and supplier get $5 less than before then the tax incidence on both of them is equal.

Tax incidence or burden falls more on the inelastic variable, if the demand in the market is more inelastic then larger tax incidence will fall on them and vice versa.

While taxing the public the government in the market should know that the elasticity, if they tax an elastic goods then demand will fall and revenue will be raised less, so to raise higher tax they should tax an inelastic goods.