Question

Tax incidence focuses on who:

A) has the most elastic demand

B) has the most inelastic supply

C) bears the economic burden of a tax

D) bears the statutory or legal burden of a tax

Answer 1

Incidence of tax means how much proportion of tax falls on buyers or on sellers and it depends on the relative elasticity of demand and supply.

Irrespective of on whom tax is imposed, tax burden will be shared by both sellers and buyers.

The burden of tax falls more on the inelastic side, so if demand is relatively inelastic, then burden of tax falls more on buyers while burden of tax will be less on the sellers and vice-versa.

It means that tax incidence focuses on who has the most inelastic supply.

Hence option B is the correct answer.