Question

a. Explain the difference between the statutory and economic incidence of a tax. b. How do the elasticity of demand and supply determine the incidence of a tax on the supply of a good?

Answer 1

Statutory incidence of tax represents the imposition of the tax on particular party such as consumer or producer. It indicates who is finally going to deposit the tax or on whom the tax is imposed.

Economic incidence of tax indicates how the tax is shared between the consumers and producers. It is different from the statutory incidence of tax because in the latter case, the same market participant pays the tax on which it is imposed. However in case of economic incidence it is possible that the market participant may not be paying any tax all together, on whom the tax is imposed.

the incidence of tax depends upon the demand and supply elasticity in the sense that the less elastic side of the market bears a greater tax burden. If demand is a less elastic than consumers bear a greater tax burden and if supply is less elastic than producers bear a greater tax burden